In recent years and in many parts of the world, companies, individuals, and technical developers have used initial coin offerings, also called “ICOs,” “token sales,” and “digital asset sales,” as a way to raise capital to fund the development of blockchain-based technologies, networks, and services. This method of capital raising is novel in that it takes advantage of various recent and ongoing technological advancement to create an arguably more efficient method by which to not only raise capital but also allow for contributor participation in the project.
Where “participation” in an ICO is limited to little more than passive speculation on the part of the capital contributor that his/her capital contribution will appreciate in value, however, the fund raising process likely involves regulated activity under the U.S. federal securities laws. As such, project creators selling the tokens or digital assets would need to comply with securities laws, including offering and selling the assets in a registered offering or pursuant to an exemption from registration.
After the digital assets or tokens are issued they are often able to be freely resold without technological restrictions to others in a secondary market on so-called “exchanges” or digital asset trading platforms. In the absence of compliance with the securities laws in the offering, aftermarket trading on these platforms can only exacerbate investor protection concerns that tend to under-gird regulatory concerns in the United States and other jurisdictions.
There is nothing inherently good or bad about these new technologies and financial products. Yet, the persons behind such projects can potentially use the novelty of the technology as a way in which to improperly entice investors with the promise of high returns in a new investment space. The lack of disciplined disclosure, accountability on the part of the project creators, and regulatory oversight is at the root of concerns in this space.
If helpful, here are some basic concepts that you should educate yourself on before considering contributing capital to an initial coin offering, token sale or related offering:
- What is a blockchain?
- What is a digital asset, coin, or token?
- What is a digital asset trading platform (“exchange”)?
- Who can issue digital assets, coins, or tokens?
- Things to consider when determining whether to contribute capital to an ICO (or related offering)