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An initial coin offering (ICO) is a controversial means of crowdfunding centered around cryptocurrency,[1][2] which can be a source of capital for startup companies.[3] In an ICO, a quantity of the crowdfunded cryptocurrency is preallocated to investors in the form of "tokens", in exchange for legal tender or other cryptocurrencies such as bitcoin or ethereum. These tokens supposedly become functional units of currency if or when the ICO's funding goal is met and the project launches.

ICOs provide a means by which startups avoid costs of regulatory compliance and intermediaries, such as venture capitalists, bank and stock exchanges,[4] while increasing risk for investors.[5] ICOs may fall outside existing regulations or may need to be regulated[6][7] depending on the nature of the project, or are banned altogether in some jurisdictions, such as China and South Korea.[8][9]

On January 30, 2018, Facebook banned advertisements for ICOs as well as for cryptocurrencies and binary options.[10][11]



Time-lapse visualization of initial coin offering growth, 2014–2017

The first token sale (also known as an ICO) was held by Mastercoin in July 2013. Ethereum raised money with a token sale in 2014,[12] raising 3,700 BTC in its first 12 hours, equal to approximately $2.3 million dollars at the time.[13] An ICO was held by Karmacoin in April 2014 for its Karmashares project.[14]

ICOs and token sales became popular in 2017. There were at least 18 websites tracking ICOs before mid-year.[15] In May, the ICO for a new web browser called Brave generated about $35 million in under 30 seconds.[16] Messaging app developer Kik's September 2017 ICO raised nearly $100 million.[17] At the start of October 2017, ICO coin sales worth $2.3 billion had been conducted during the year, more than ten times as much as in all of 2016.[18][19][20][21] As of November 2017, there were around 50 offerings a month,[22] with the highest-grossing ICO as of January 2018, being Filecoin raising $257 million (and $200 million of that within the first hour of their token sale),[23].

Kik had previously issued $50 million in tokens called "Kin" to institutional investors, and sought to raise an additional $125 million from the public. In connection with this ICO, an unidentified third party executed a phishing scam by circulating a fake URL for the offering through social media.[24]

By the end of 2017, ICOs had raised almost 40 times as much capital as they had raised in 2016, although still amounting to less than two percent of the capital raised by IPOs.[5] According to Cointelegraph, companies raised around $6 billion via ICOs in 2017; 37% of that amount was made by only 20 ICOs.[25]


The term may be analogous with "token sale" or crowdsale, which refers to a method of selling participation in an economy, giving investors access to the features of a particular project starting at a later date. ICOs may sell a right of ownership or royalties to a project, in contrast to an initial public offering which sells a share in the ownership of the company itself. Amy Wan, a crowdfunding and syndication lawyer, described the coin in an ICO as "a symbol of ownership interest in an enterprise—a digital stock certificate".[26] In contrast to initial public offerings (IPOs), where investors gain shares in the ownership of the company, in ICOs, the investors buy coins of the company, which can appreciate in value if the business is successful.[27][28] These coins are sometimes "pre-mined", eliminating the need for proof of work. Often contributions are capped at a certain value and depending on how long the ICO lasts, on a per-day basis. Conversely, those same coins can depreciate if the company does not perform.

At least 400 ICOs have been conducted as of August 2017.[29]

Ethereum is (as of February 2018) the leading blockchain platform for ICOs with more than 80% market share.[30] Tokens are generally based on the Ethereum ERC20 standard. According to Cointelegraph the Ethereum network ICOs have resulted in considerable phishing, Ponzi schemes, and other scams, accounting for about 10% of ICOs.[31][32]


As a mechanism for scams

ICOs can be used for a wide range of activities, ranging from corporate finance, to charitable fundraising, to outright fraud.[33] The U.S. Securities and Exchange Commission (SEC) has warned investors to beware of scammers using ICOs to execute "pump and dump" schemes, in which the scammer talks up the value of an ICO in order to generate interest and drive up the value of the coins, and then quickly "dumps" the coins for a profit. The developers themselves can be guilty of such tactics.

However, the SEC has also acknowledged that ICOs "may provide fair and lawful investment opportunities".[34] The UK Financial Conduct Authority has also warned that ICOs are very high risk and speculative investments, are scams in some cases, and often offer no protections for investors. Even in cases of legitimate ICOs, funded projects are typically in an early and therefore high-risk stage of development.[35] The European Securities and Markets Authority (ESMA) notes high risks associated with ICOs and the risk that investors may lose all of their cash.[36] Increased regulation of ICOs will reportedly encourage institutional investors to invest in them.[37]

As a bubble

A 2017 Wired article predicted in 2017 that the bubble was about to burst.[38] Some investors have flooded into ICOs in hopes of participating in the financial gains of similar size to those enjoyed by early Bitcoin or Ethereum speculators.[39]


The regulatory treatment of cryptocurrencies is evolving and is complex.

Cryptocurrencies are based on distributed ledger technologies which enable anyone to purchase or transfer their cryptocurrency holdings to any other person without the need for an intermediary (such as an exchange) or to update a central record of ownership. Cryptocurrencies can be transferred easily across national and jurisdictional boundaries. This makes it difficult for central authorities to control and monitor the ownership and movement of holdings of cryptocurrencies.

Countries have different approaches to how they regulate cryptocurrencies. This can depend on the nature of the cryptocurrency itself.

There are two main types of cryptocurrencies from a regulatory perspective: utility tokens and asset-backed tokens. Utility tokens may have value because they enable the holder to exchange the token for a good or service in the future, such as Bitcoin. Asset-backed tokens may have value because there is an underlying asset which the holder of the token can attribute value to. In many countries it is uncertain whether utility tokens require regulation, but it is more likely that asset-backed tokens do require regulation.

This makes it complex for the issuers of cryptocurrencies to analyse which countries their tokens (or coins) can be sold into, and for the prospective purchasers of cryptocurrencies to understand which regulations, if any, should apply.

The Gibraltar British Overseas Territory Financial Services Commission announced in early February 2018 that regulations are being developed to qualify "authorized sponsors" of ICOs, who are supposed to be "responsible for assuring compliance with disclosure" and compliance with "financial crimes rules".[40]

Jurisdiction Comments
Australia ASIC issued guidance in September 2017 stating that the legality of an ICO depends upon its detailed circumstances.[41][42]
Canada Working on regulating ICOs.[43]
China On September 4, 2017 seven Chinese financial regulators officially banned all ICOs within the People's Republic of China, demanding that the proceeds from all past ICOs be refunded to investors or face being "severely punished according to the law".[44][45][46] This action by Chinese regulators resulted in large sell-offs for most cryptocurrencies.[46] Prior to the Chinese ban, ICOs had raised nearly $400 million from about 100,000 Chinese investors.[47] A week later, however, a Chinese financial official stated on Chinese national television that the ban on ICOs is only temporary until ICO regulatory policies are in place.[48]
France As of October 2017, the Autorité des marchés financiers (AMF) was working on regulations governing the use of blockchain technology in capital raising transactions.[49]
Hong Kong The Securities and Futures Commission released a statement in September 2017 explaining that tokens may constitute securities for purposes of the Securities and Futures Ordinance, in which case dealing in such tokens would be a regulated activity under Hong Kong law.[50]
Isle of Man Working on regulating ICOs.[51]
Jersey In December 2017, Arc Fiduciary Ltd, based in Jersey, launched the "Arc Reserve Currency", an asset-backed cryptocurrency based on the Ethereum blockchain.[52], working closely with the Jersey Financial Services Regulator to achieve a workable regulatory solution for the ICO[53] The Arc Reserve Currency does not have a continuing regulatory status, but it is a notable example of how cryptocurrency operators are increasingly working with regulators to improve the investment landscape for holders of cryptocurrencies.
New Zealand In October 2017, the Financial Markets Authority (FMA) released guidelines on the current regulatory environment in regards to ICOs.[54]
Gibraltar In October 2017, the government of Gibraltar established a framework for regulating distributed ledger technology (DLT) companies, which came into law on January 1, 2018. It encompasses ICOs and subjects them to financial controls and standards.[55]
South Korea The Korean Financial Services Commission prohibited ICOs in September 2017 and promised "stern penalties" for violations.[56][57]
Switzerland Although Switzerland was previously viewed as a friendly jurisdiction to coin offerings, the Swiss Financial Market Supervisory Authority announced an investigation of an unspecified number of coin offerings in September 2017, and would examine whether these offerings were in compliance with Swiss regulations.[57][58]
United Arab Emirates The Abu Dhabi Global Market issued official guidance on ICOs in October 2017.[59]
United States In July 2017 the U.S. Securities and Exchange Commission (SEC) indicated that it could have the authority to apply federal securities law to ICOs.[60] The SEC did not state that all blockchain tokens (ICOs) would necessarily be considered securities, but that determination would be made on a case-by-case basis.[61] The SEC action may encourage more mainstream investors to invest in ICOs,[62][26] although ICOs typically prevent U.S. investor participation to remain out of the jurisdiction of the United States government.[63] The SEC charged Maksim Zaslavskiy for fraud in September 2017 in connection with the ICOs for RECoin and DRC World.[64] The SEC ruled that celebrity ICO endorsements must disclose the amount of any compensation paid for the endorsement.[65] In December 2017, the SEC issued an order stating that the utility-token ICO of Munchee Inc. was classified as a security.[6]

International ICOs may need to consider U.S. regulations to avoid falling foul of the SEC in the event of U.S. persons acquiring tokens. There are two choices for the coin-issuing company, if they do not plan on seeking a full SEC registration:

·Rule 506(c): the token sale can be broadly solicited to an unlimited number of purchasers so long as the Company meets two conditions (1) All token purchasers in the offering must qualify as Accredited Investors; and (2) The Company must have undertaken reasonable steps to verify that all purchasers are Accredited Investors.

·Regulation S: should the Company choose to exclude US token purchasers they may do so under Regulation S of the Securities Act. Among other requirements, (i) the Company must verify that the token sale is made outside of the US to non-US persons (ii) there are no direct selling efforts made in the US and (iii) the securities or tokens will not be transferred to investors or token purchasers in the US or to US persons for at least one year following the original token sale.

See also


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