Finance and Crypto

The Initial Coin Offerings (ICO) And Regulations

The common method for businesses to come up with capital was either to make contact with private investors or through an IPO (through the public). Then the ways of raising capital had been modified, be it through institutional investors or through crowdfunding. In recent years, however, new technology has emerged that is changing corporate fundraising. This technology is the blockchain on which the cryptocurrency Bitcoin and other altcoins are issued.

What is an Initial Coin Offering?

Background

Blockchain is a decentralized, distributed, digitized public ledger that records transactions based on a peer-to-peer verification process. The method of raising capital via the blockchain was called Initial Coin Offering (“ ICO ”). Any kind of organization, regardless if in the physical sense or within the virtual decentralized independent organization, can undergo an ICO. To make understanding easier, many people compare an ICO with an IPO. This linked the term ICO to the meaning of an IPO.

Regardless of whether the IPO and ICO serve the same purpose, they are not identical. In the case of IPOs, the company offers investors a stake in the property with all associated rights, while this is not necessarily the case with coin (also token) sales. In addition to an IPO, the company can raise funds before launching a product in an ICO. In general, all the entrepreneurs ICO needs to prepare a white paper explaining how they want to use blockchain technology. The white paper is not a prospectus, nor does it contain detailed information.

In fact, it is better for companies wishing to distribute coins or tokens to avoid similarities with the IPO. The term ICO itself is, therefore, better to avoid for the impression it creates from the perspective of the authorities that the virtual coins are linked to securities. A term like a coin distribution could serve the purpose the company is aiming for. In all cases, the structure of the token sale is what really matters, as explained in more detail below.

Token sale event

In fact, the lack of specific legislation in most countries dealing in coin sales has led some countries to apply their securities rules to them. For these provisions to apply, the tokens must meet the definition of a security. The face of the issuers is that when authorities qualify the sale or distribution of their tokens as collateral, many obligations, mainly disclosure and registration, are imposed. This could hinder their early development and growth.

Before we turn to the legal part of this article, let’s examine how ICO works. ICOs would typically include an entity that sells tokens on the blockchain to people, which in turn are exchanged for assets. The assets can be Fiat Money (so-called “real” money), virtual currencies such as Bitcoins or Ether, services, or other assets. These assets are then used to fund projects that typically include blockchain technology to make a profit. Those distributed tokens may grant their holders various rights, including voting rights, ownership rights in the company, rights to participate in the profits generated, or just the right to access or use products or services. Based on the properties of these rights, the tokens may or may not be classified as securities.

The Continuous ICO Model – Continuous Token offering

A newly founded fintech company hopes to use the token sale model for investments in real assets. But it is different from many previous projects.

Two Prime, based in Hong Kong, (founded by Marc Fleury) refers to the sale as Continuous Token Offering or CTO, in contrast to an Initial Coin Offering or ICO, where almost all tokens are traded at an earlier stage. The goal is to use the funds raised to make crypto a suitable new asset class that appeals to the financial world.

The company will initially release five million tokens (only five percent of the total 100 million to be created) on the secondary markets, the rest will be released in the next 10 years. This is similar to Ripple’s approach to its XRP sales, and the company said the process is similar to that of raising capital.

At the end of February, Prime’s two FF Accretive Tokens (FF1) will initially be traded on the Japanese crypto exchange Liquid. Prices start at $ 3 per token, the company said.

“One of the greatest successes of cryptocurrencies has been the rapid formation of funds, as demonstrated by the initial boom in coin offering,” said the company’s chief operating officer, Alexander Blum.

According to Blum, seed financing for start-ups through token offerings on exchanges overtook private equity in 2017. “Since VCs generally avoid the seed phase, [ICOs] filled a niche that traditional financial players have not addressed,” he said.

According to Two Prime, the token offers a purchase option that “combines the features of a closed-end fund, an asset-backed token and a secure store of value”.

CEO Fleury has invested $ 2 million of his personal wealth in the fund. The company also announced to CoinDesk that Hong Kong-based private equity firm SIB Investment Ltd. is the first external investor.

Fleury founded JBoss, a Java-based open-source application server, in 1999. The company was sold to Red Hat in 2006 for $ 420 million. Red Hat is now owned by IBM.

Regulatory risk

As with other startups venturing into token deals, the company must also avoid getting on the wrong side of investors or regulators.

Ripple, which has raised billions from the sale of XRP and equity financing rounds, has been involved in a class-action lawsuit filed by investors accusing the company of selling unregistered securities.

A number of companies have launched ICOs, which are later charged by the United States Securities and Exchange Commission with failing to register their tokens as securities.

Two Prime reported that it has consulted with law firms in various jurisdictions and has developed an approach that will reduce the potential challenges for financial regulators.

The company will first list the tokens on the Asian trading exchanges to determine how much grip the investment could earn from traders. Then it will be set up for Special Purpose Vehicle (SPV) in the United States to offer the tokens as security.

Unlike many other ICOs, the fund’s tokens are backed by real assets that, according to the company, are managed by professional portfolio managers. The underlying assets include a structured portfolio of debt, cryptocurrencies and equity instruments.

The first investments are focused on the blockchain sector, while according to Blum, the company could in future expand to other sectors such as green technology and smart city management.

“Our goal is to create a new asset class by applying traditional investment models and theories to crypto and giving the industry confidence and professionalism,” said Fleury.