Initial Coin Offering (ICO)

An Initial Coin Offering, also widely known as an ICO, is a fundraising instrument where new projects sell their base crypto tokens exchanging for bitcoin and ether. It is similar to an Initial Public Offering (IPO), in a way, where investors buy shares of a company.

ICOs are quite a new phenomenon. However, they have quickly become a dominant topic of talk within the blockchain community. Many see ICO projects as outlaw securities that let founders raise an unreasonable amount of capital, while others gave their rebuttal that it is a breakthrough from the traditional model of venture-funding. The U.S. Securities and Exchange Commission (SEC) has lately came to a decision about the status of tokens.

The infamous DAO ICO fiasco has forced many projects and investors to re-think the funding models of many ICOs. The most important thing to consider is whether or not the token makes it through the Howey test. If it does, then it must be considered a security and will be subjected to specific restrictions by the SEC.

ICOs aren’t difficult to structure thanks to technologies such as the ERC20 Token Standard, which eases a lot of the development process needed to create a new crypto asset. Most ICOs operate by having investors give funds (often bitcoin or ether) to a smart contract that keeps the funds and distributes an equivalent value in form of the new token later in time.

There aren’t actually many restrictions saying who can participate in an ICO, given that the token is not a security in the first place. And because you’re taking money from a global pool of investors, the sums gathered in ICOs can be gargantuan.

A basic issue with ICOs is that most of them generate money before the actual product is released. This places a speculative and risky nature to the investment. The rebuttal is that this style of fundraising is particularly useful (or even necessary) so that incentivize protocol can develop.

But, are ICOs Legal?

The short answer is perhaps. In legal terms, ICOs have been around in a very gray area since we can go both for and against that they’re fresh, unregulated financial assets. The recent decision from, nevertheless, has managed to clarify some of that gray area. In some situations, the token is basically a utility token.

This means it gives the owner access to a particular protocol or network; therefore, it may not be considered a financial security. On the other hand, if the token is equity, this would mean that its only purpose is to appreciate in value, then it will be more similar to a security.

While many individuals buy tokens to access the base platform sometime in the future, it’s hard to ignore that the majority token purchases are for speculative investment purposes. This is easy to make certain if we are provided the figures for validating many projects that haven’t released their commercial product.

The SEC decision may have given some clarification between utility vs security tokens; however, there are still a lot of room for testing the borders of legalities. For the mean time, and until further regulatory limits are enforced, entrepreneurs will move on to make the most use out of this new phenomenon.

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