ICO’s – The future of fundraising?

An “Initial Coin Offering” (or ICO) is a method by which cryptocurrency start-ups can raise the funds required to initiate its particular venture. In a nutshell, the company sells a percentage of the cryptocurrency to early backers of the project in consideration for legal tender (or other cryptocoins). 

It is a method that has proven fruitful to many cryptocurrency start-ups – more than $2bn has already been raised since the first ICO (the initial, initial coin offering) was issued in 2013. One of the more recent examples is Filecoin, a blockchain based storage network, which managed to raise over $200m in less than an hour back in early August – this was in addition to the $52m it raised in a token pre-sale ahead of the ICO.

Whilst, to some extent, comparisons can be drawn with the traditional (and similar sounding) IPO (initial public offering), in which companies offer shares to the public with the ultimate goal of raising capital, such comparisons can be slightly misleading. ICO’s and IPO’s are actually quite different. For example, whereas investors to an IPO receive ownership rights in the company (through the purchase of the shares being initially offered), those who invest in ICO’s receive cryptocurrency or other tokens issued on a blockchain.

Moreover, unlike IPO’s, ICO’s are unregulated, meaning that start-ups effectively bypass the “red-tape” that would ordinarily be required of traditional fundraising methods. ICO’s can also be distinguished from crowdfunding (the raising of funds through the use of small amounts of capital from a large number of individuals).

Where a cryptocurrency start-up wants to raise money through an ICO, it will typically crate a plan (known as a “whitepaper”) which will specifically and methodically detail what the project is all about, what the project will fulfil on its completion, how much money is required for the project, what type of money is accepted and how long the ICO campaign will be running for (i.e. the closing date for investment).

ICO’s can be attractive for supporters who, despite not receiving any ownership (as one would in an IPO) could see the value of the cryptocoin they initially invested in significantly rise from the price paid at the ICO.

The legal and regulatory framework for blockchain in Gibraltar is still in its infancy, a proposed regulatory framework for Distributed Ledger Technology (“DLT”) was published earlier this year, and although we will need to wait and see what is developed in this respect, we strongly expect the development of an environment that will nurture start-ups that operate in this space, whilst also being mindful of the inherent risks that can be involved and providing a robust regime to tackle these issues.

The FSC issued its own statement on ICOs in September 2017.It can be read here: http:// www.fsc.gi/news/statement-on-initial-coin-offerings-250

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