Initial coin offerings (ICOs), the cryptocurrency world's version of initial public offerings (IPOs), have quickly become a popular way for crypto and blockchain start-ups to raise funds. However, as we've previously written, concerns around this latest method of raising capital continue growing. Primarily that's because a lack of regulatory clarity among global governing bodies means there are too many ways fraudulent activity can be easily masked via an initial coin offering.
Of course, that doesn't mean that all ICOs are fronts for illegal activity. According to CoinDesk data, in Q1 2018 it's estimated that around $6.3 billion in funding has been raised by ICOs. That's 118 percent of the total for 2017.
Though these offerings can be quite successful, extreme variance in regional cryptocurrency regulation means there are some locations where ICOs are totally illegal, other areas where government oversight of both the offering itself and the parties initiating the ICO can be highly demanding, and yet other countries that require little to no paperwork. Of equal concern, particularly when government inspection is highly intense—such as recent ramped up activity by the US's Security and Exchange Commission (SEC)—there’s now a reportedly higher ICO failure rate.
Case in point: Telegram, the London-based, free cross-platform messaging service recently canceled the $1.7billion ICO sale of its GRAM alt-currency, allegedly because of increasingly tight SEC regulatory scrutiny. It should be noted, however that though the public offering was canceled, private investors who acquired the token in a company presale are still trading the alt-currency, at a profit.
Nevertheless, if the current regulatory environment is blunting high-profile initial coin offerings, could the practice eventually be destined to disappear?
As a rule, business start-ups have always been risky ventures to fund. Some inevitably succeed, but many more tend to fail. Will we therefore see a digital graveyard of failed ICOs in 2018?
There have been a number of ICOs which have failed, though so far due mostly to unsavory behavior and/or outright scamming. One notable story to hit the headlines in late 2017 involved Maksim Zaslavskiy. He was accused of violating US anti-fraud and federal securities registration provisions. Zaslavskiy and his two companies were selling unregistered securities and the digital tokens or coins he was offering never actually existed.
But all too frequently, the lack of regulatory clarity and transparency rather than actual oversight is what seems to be the real trigger for smothering ICOs. Recently, an SEC official working in the commission's Enforcement Division disclosed that the agency is conducting "dozens" of investigations in this area.
One particular case, SEC v. Jones, Cheryl, illustrates the confusion currently surrounding many ICOs. Jones is referred to below as a “participant" in the selling of unregistered securities:
“According to the SEC, Jones’ brother created a bridge fund, which allegedly fraudulently offered unregistered securities. In 2007, Jones became one of the first investors in the bridge fund. Soon after investing with her brother, but while holding no official title in the bridge fund ….. Although Jones held no formal title with the bridge fund, the SEC still asserted her liability as a participant in the selling of unregistered securities that did not comply with an exemption from registration based upon her active involvement in the solicitation of investments, charging her with violations of Section 5 of the Securities Act, and sought disgorgement of her gains, prejudgment interest, and a civil penalty. This case is one to watch as it remains pending.”
Without significant legal background, it seems difficult to fully untangle what exactly is being alleged. Zoe Adamovicz, CEO and co-founder of Neufund says that ICO sponsors may not fully even understand which regulations are applicable, and may therefore inadvertently do something outside the law, without being aware they've stepped into illegal territory. Without clear and specific guidelines she notes, coin offerers won't be motivated to initiate opportunities and investors will be apprehensive rather than attracted.
“I personally believe that only by bringing regulatory clarity and specific grounds to the blockchain ecosystem can we make it really attractive to all investors, including traditional VCs, corporate investors and angel investors.”
Technical Regulatory Competence Still Missing
Pavel Roytberg, co-founder of healthcare blockchain startup, Doctor Smart, agrees. Without technically competent regulation that's also fully transparent—something that neither national, nor international law has yet provided—there are very few crypto-appropriate guidelines available. At present Roytberg notes, different countries either completely prohibit ICOs while they wait for some sort of better international regulatory benchmarks to somehow arrive or they apply already existing standards which don't fully address this specific asset class. In either case, there's still no available legislative framework in place.
The other side of this spectrum are countries that provide complete freedom to ICO issuers, then adjust legislation on the fly.
“On the example of the technological sector in medicine that Doctor Smart represents, I can say that in the long-term the first solution is better. Competent and precise regulation spurs activity of both startups and investors. A certain entry threshold appears that cuts off scammers and immature projects, and gives investors a signal that projects which launch their ICOs are really worthy of close attention.”
Lack of consistent regulation across the globe, in both secondary and primary markets, is the predominant problem facing the ICO space, says Heinrich Zetlmayer, General Partner at Blockchain Valley Ventures, an accelerator and venture capital firm developing and investing in blockchain businesses. As long as individual investments are below certain limits, says Zetlmayer, primary markets—the sweet spot for ICO investment—should be liberalized for asset and security token offerings.
As for secondary market regulation, Zetlmayer believes this should be harmonized to a pragmatic standard. It's his view that, in principle, it is correct to ask exchanges to have a base level of security, grievance, anti-fraud, and anti money laundering protection.
Regulation will inevitably be brought to asset classes where a large number of ordinary people have been scammed, explains Shiv Malik, head of communications at, Streamr, a Switzerland-based technology company.
“Those open-source projects which have attempted to crowd fund in the most diligent and stringent way possible would ordinarily welcome that, but we don't want to throw the baby out with the bathwater. Raising capital for open-source projects is a huge deal because it allows access to the big computing infrastructures of the future like Ethereum, at the lowest possible cost. That's a public good that needs to be nurtured not annihilated."
Just the fact that Telegram's ICO reached close to $2 billion in funding before it was shut down shows there’s immense interest in appropriate ICOs. It's time for regulators to catch-up by providing guidelines and clarity for what's legal for initial coin offerings.