Everything beginners need to know about initial coin offerings

This article is part of Tech in Asia’s partnership with Asia Law Network where we publish articles written by lawyers on their advice for startup founders. For more articles in this series, go here.

This is the first of a three-part series on initial coin offerings (ICOs), where I will discuss the following:

• Introduction to ICOs
• Overview of current regulations on ICOs in various jurisdictions
• Framework of ICOs

What are ICOs?

An ICO, also called a token sale/initial token offering, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for more established tokens such as Bitcoin and Ethereum. It’s somewhat similar to an IPO where investors purchase shares of a company.

ICOs generally operate by allowing investors to use cryptocurrency to purchase coins/tokens via the internet for a set period of time. These ICOs are often global offerings which can be created and/or accepted anonymously.

Perhaps, the most famous ICO so far is that of Ethereum, which raised US$18 million in 2014 by selling tokens that facilitate online contracts. Today, Ethereum-powered contracts are proliferating, and the tokens have a market cap of approximately US$60 billion as of mid-April 2018.

ICOs typically vary in nature. But organizations usually sell coins/tokens  to obtain capital for software development, business operations, business development, community management, or other initiatives.

Tokens are cryptographically secured digital representations of a set of rights. Depending on the token, this could include the right to access and use a network or software application, the right to redeem the token for a unit of currency or goods, the right to receive a share of future earnings, the right to vote on decisions made by the organization, and more. Anyone with access to the internet can launch or invest in an ICO.

Proponents believe that ICOs are a transformative approach to fundraising that enables consumers to benefit more directly from the popularity of new technologies than they would if they owned a traditional stock. On the other hand, critics fret that ICOs occupy a regulatory grey area that could leave investors vulnerable to fraud and land startups in legal trouble. Given that ICOs are still in its infancy, both sides may be right.

Characteristics of ICOs

Some key characteristics of an ICO include:

• Participation in a project, a decentralized autonomous organization (DAO), or an economy.
• Coin ICOs generally sell participation in an economy, while token ICOs sell a right of ownership or royalties to a project or DAO.
• Owning tokens does not always give the investor the right to vote on the direction of a project or DAO, though generally the investor will have input throughout a project’s lifespan.
• The majority of ICOs involve the creation of a defined number of coins or tokens prior to sale.
• ICO prices are usually established by the creators of the economy, project, or DAO.
• ICOs may have multiple rounds of fundraising, with coins or tokens on offer increasing in value until the release date. Early investors are likely to have greater rewards embedded within their tokens as an incentive.
• ICOs conclude once the coins or tokens are tradable in the open market.

How are ICOs different from traditional IPOs?

IPO

ICO

Types of tokens/coins

Benefits of ICOs

Risks of ICOs