Initial coin offerings or ICOs are growing rapidly. Essentially a method of crowdfunding facilitated through blockchain and cryptocurrency technologies, ICOs are reported to have raised almost $1.3 billion globally from the start of 2017 despite being denounced by some commentators as Ponzi schemes.
Companies and financial institutions are keen to explore the possibilities of ICOs – whether as a fundraising method or to cash in by acting as advisers or arrangers – but what are the risks, how are ICOs regulated and how might this change?
The tokens under an ICO will typically entitle holders to a right derived from the underlying asset or business arrangement, for example:
• The right to a profit or asset (such as the distribution of actual profits or through the repurchase and the virtual destruction (termed ‘burning’) of repurchased tokens which
theoretically reduces supply, so increasing the token price).
• A right of use (say of a system or particular service offered by the issuer).
• Voting rights (for example, as a participant of a decentralised currency exchange operated by the issuer).
How does it work?
ICOs are typically announced through online channels such as cryptocurrency forums and websites. Most issuers will provide access online to a white paper describing the project and key terms of the ICO (its economic terms, subscription details, timeline, for example), and providing information on the status of the project as well as the key team members involved.
In the subscription process, the participant generally is required to transfer cryptocurrency to the issuer – typically to one or more designated addresses (an online reference for cryptocurrencies similar to an account number) or online wallets of the issuer. Subscriptions may
be completed in minutes.