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?
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.