Recent months have seen an explosion in the number of ICOs (or “Initial Coin Offerings”) undertaken to raise project-development funds from the crowd.  This trend has not gone unnoticed by smart entrepreneurs eager to ride the wave, and has lead an increasing number of business owners to consider whether they too might use an ICO to raise capital for their own projects.  But what are ICOs, and how can they be used as crowd-sourced fundraising?

Initial Coin Offerings

At a high level, an ICO is essentially an event where a blockchain-based project sells “tokens” to early adopters and enthusiasts in exchange for money today (typically, using Bitcoin or other cryptocurrencies that can then be traded into Australian dollars).  It combines elements of crowdfunding with traditional capital raising activities, but with a crytocurrency element.

ICOs generally take place before the project is completed.  The crowd-sourced funds raised from the ICO can then be used to cover operational costs and the costs of completing and implementing the project.

Once the project has launched, the digital token can either be used in accordance with the project’s application (which will of course vary from case to case), or be traded on an exchange for other cryptocurrencies or dollars.  Investors in ICOs are therefore anticipating that demand for the tokens (and the price payable for the tokens) will increase in future, such that they can later sell their tokens for a return.

To date, ICOs have collectively raised hundreds of millions of dollars to finance early-stage projects.  This year alone, early-stage blockchain entrepreneurs have raised more money via ICOs than from venture capital.

ICOs vs IPOs and other capital raisings

ICOs are often compared to Initial Public Offerings (IPOs) of a company’s shares on a securities exchange, and there are some similarities between the two.  For example, both are used to raise money by selling a stake in something, and both ICOs and IPOs have investors who risk their capital for the opportunity to make a return through an increase in value and trading.

However, there are some important distinctions as well.  IPOs offer securities (i.e. shares) to investors, and are therefore subject to ASIC / ASX rules and regulation under the Corporations Act.  For instance, before an IPO can be undertaken, the company would need to go through the usual due diligence and prospectus preparation process, as well as admission to the ASX.

Even outside the IPO context, any conventional capital raising not using a disclosure document (such as prospectus) undertaken by issuing shares or other securities to investors are also subject to some strict rules under the Corporations Act.

By contrast, commentators have generally considered the purchase of tokens in an ICO to be the prepayment for goods or services, as opposed to a financial product falling within the government watchdog’s regulatory bounds.  Accordingly, ICOs are currently a relatively unregulated area.

ASIC Chairman, Greg Medcraft, recently discussed ICOs and noted that ASIC is still considering its position in relation to regulating these products.  The Chairman noted that ICO tokens are unlikely to be considered equity securities and stated that:

"They’re a very interesting concept.  An ICO is not equity – you're offering basically something that is the product of the entity that is doing the launch.  You're taking a bet on getting that product early.  How different is that if I go to Kickstarter and I buy something – a watch – and then I get that watch and sell it in the future? It's no different, is it?”

However, the Chairman also noted that certain ICO tokens might be sufficiently similar to securities to fall within ASIC’s mandate, particularly around the provision of financial services surrounding the ICO. 

Motus Legal already works in the traditional capital raising arena and well-versed in the financial products regulation space, and would love to explore potentially working on ICOs with another progressive businesses at the cutting edge of the capital markets. 

Come talk to us!

The team at Motus Legal