In 2016, blockchain startups raised some $200 million in Initial Coin Offerings, a new form of crowdfunding based on cryptocurrency tokens. Some of the..
In 2016, blockchain startups raised some $200 million in Initial Coin Offerings (ICO), a new form of crowdfunding based on cryptocurrency tokens. This figure might not be much compared to the billions being poured in by VCs and Kickstarter-style crowdfunding , but it shows a huge year-over-year growth for blockchain crowdsales.
Some of the startups have raked in millions of dollars with barely more than a promise and a website; several have failed to deliver on those promises.
As is with blockchain itself, expert opinion is highly polarized on the crypto – token crowdfunding hype, its reliability, its legality and its future. Here’s what you need to know.
In a nutshell, projects launch an ICO by issuing crypto -tokens on the blockchain (usually the Bitcoin or the Ethereum blockchain), giving early investors the chance to acquire tokens in exchange for cryptocurrency.
ICOs are usually limited by time or a cap on the amount of funds raised. The value and number of tokens released can be static or calculated based on the amount of funds raised.
Crypto-tokens have become an easy way for blockchain startups to fund their projects early in the development cycle, and for regular users and enthusiasts to invest in projects of potential value and have a say on how their future is shaped.
The legal classification of ICOs and crypto -tokens remains murky and a point of contention. They borrow traits from both IPOs and traditional crowdfunding (e.g. Kickstarter, Indiegogo), while at the same time they bear enough difference to avoid fitting into any of those categories.
They do not account as donations because they give crypto – token purchasers a stake in the company and a right to vote on future decisions. Neither can they be called the cryptocurrency equivalent of stocks.
The U. S. Securities and Exchange Commission (SEC) and their counterparts in other countries have remained largely silent on whether crypto -tokens account as securities. A framework put forth by Coinbase, Coin Center, Consensys and Union Square Ventures tries to weigh in on the issue but stops short of providing a definite answer, part of which is due to the unregulated nature of the blockchain itself.
Others, such Preston Byrne , blockchain expert and COO at Monax , are more vocal in their dismissal of token sales as being legal at all. “Real investments are legal in nature in that they specify the rights and obligations of the parties to them and have to follow certain, entirely arbitrary formalities to be valid and binding,” Byrne said in a Slack conversation. “And they rely on the courts for their enforcement.”
If an issuer fails to meet investors’ expectations, such as abstaining from repaying a loan, investors can then go to a court and seek performance, perfection of title to collateral or damages in order to be made whole for their losses.
“Tokens, on the other hand, usually disclaim that any legal relationship exists between the token -seller and the investor at all,” Byrne says. “Fortunately for the law, legal obligations around the marketing of investments are arbitrary and exist no matter how loudly token -peddlers may protest that ‘this time it’s different’ or that ‘blockchains represent a new paradigm.’ The difference between a legal scheme and an illegal one is whether there is a legitimate, legal investment opportunity — a real business with a legal obligation to the investor to deliver something — that underlies it.”
Byrne underlines that coin offerings often don’t follow regulations and purport not to create any legal obligations for the scheme promoter to deliver anything in return to the investor. “Indeed the scheme promoter often expressly disclaims these obligations in their offering documents,” Byrne says. “At the same time the scheme promoter, expressly or impliedly, makes it known to the investors that profits may be expected from the scheme.”
Many view ICOs and crypto – token sales as fraudulent schemes for a quick money grab.
Building on his previous arguments and referring to the FTC definition of pyramid or Ponzi schemes , Byrne clearly stipulates, “In my informed opinion, many ‘coin offerings’ run the risk of being seen as closer to Ponzi schemes of the past than they are to legitimate investment products of the present-day.
