Will the Initial Coin offerings (ICO) crowd out crowdfunding?

There has been a lot of talk about crypto-currencies and blockchain technologies lately.

The uninitiated discover a new world, largely anonymous, where values (monetary, financial or otherwise) are exchanged, without trusted third parties.

They also see the press unveiling the projects of some industries that have taken advantage of this technology to reduce structural costs and be more efficient in the digital age. For example, banks which want to share their « KYC » data to identify their customers for anti-money laundering purposes, or collective management organisations. which share metadata in order to better identify streaming music.

Nonetheless, what non-experts in crypto-economics often ignore is that another disruptive wave is happening, and which is likely to disrupt the way tomorrow’s startups will be financed. Once again this evolution is made possible thanks to blockchain technology.

These are « initial coin offerings » or « ICOs ».

Over the past three years, dozens of ICOs have taken place, the most famous and important being the one that launched the blockchain Ethereum (the largest today after that of Bitcoin).

By 2014 the equivalent of $18 million had been raised in bitcoins.

Recently, in April 2017, Cosmos, a French startup, raised online $16 million, in less than thirty minutes, thanks to an ICO.

Today, startups using blockchain technologies raise more funds through ICOs than through traditional risk capital (business angels, investment funds, etc.)

Typology of an ICO

In the Blockchain universe, financing needs may today cover three types of cases:

o  launch of a new blockchain (like Ethereum in 2014),

o  implementation of a « distributed autonomous organization » (DAO),

o  similarly to the TheDAO project in 2016, a decentralized investment fund that raised the equivalent of 150 million dollars (before being hacked…)

o  development of a decentralized application (called « Dapp ») that works on a blockchain platform (for example, an application allowing to share space on a hard disk drive).

Each ICO is different. Some resemble a kickstarter crowdfunding campaign by proposing to pre-purchase not a product but tokens giving rights to use the platform or the application that the ICO must fund. These tokens are sometimes referred to as « access coins » or « appcoins ».

In other cases, the ICO is more like a supply of securities for investment purposes.

In some cases, sold tokens (for bitcoins or ethers) may « represent » shares or voting rights.

Moreover, tokens are not purchased through a crowdfunding website but instead by way of a blockchain.

The tokens are usually « listed » by the cryptocurrency trading platforms (e.g. Coinbase), thus creating a sort of secondary market (and possibilities of gains, sometimes important, for tokens buyers).

The stages of an ICO

In most cases, an ICO takes place in three steps:

1.   Pre-announcement:

Prior to its launch, the ICO is announced on forums dedicated to cryptocurrency (e.g. Bitcoin Talk), with the publication of an « executive summary » synthesising the objective pursued in order to collect reactions and comments from the community.

2.   The offer

The offer is formalised by a « white paper » which details the terms and conditions of acquisition of the tokens, the rights they confer and the duration of the ICO.

The purchase of these tokens always takes place via a blockchain by paying (in bitcoins or ether) on a public address thereof.

Depending on the case, the offer is made under a pseudonym (via a blockchain public address), on behalf of a company or a foundation that guarantees the successful conduct of the ICO.

3.   The tokens sale

At the end of the ICO, the tokens are sold and become negotiable on main trading platforms.

Is an ICO subject to regulation?

The issue is pending in the United States, where a position from the Securities and Exchange Commission (SEC) is very expected.

On the contrary, the issue has just begun to be debated in Europe.

However, a clarification will have to be made as the market for ICO is growing exponentially.

As far as European law is concerned, the question raised is: should ICO be considered as a public offer of financial securities, thus subject to supervision by the financial market supervisory authorities (the “AMF” in France)?

The answer will probably be negative in many cases, considering that the tokens do not represent financial securities (shares, debt securities).

Nonetheless, ICIs are attracting more and more non-professional investors, who are in search of easy and immediate gains. Frauds have already happened, with wind-based ICOs (and purchases made via a blockchain, therefore anonymous…). This can only draw the attention of regulators.

On a short term perspective, guidelines should be issued (preferably by the European authorities or ESMA) to help characterize ICOs that may now fall under European regulation.

On a long term strategy, ad hoc regulation is likely to be necessary to protect unskilled investors.


Author : Thibault Verbiest


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