Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Is Ramped Up Government Scrutiny Killing Initial Coin Offerings?

By Investing.com (Tanzeel Akhtar/Investing.com)CryptocurrencyNov 07, 2017 03:28AM ET
www.investing.com/analysis/initial-coin-offerings-under-greater-scrutiny-200261385
Is Ramped Up Government Scrutiny Killing Initial Coin Offerings?
By Investing.com (Tanzeel Akhtar/Investing.com)   |  Nov 07, 2017 03:28AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

by Tanzeel Akhtar

As governments across the world, including in China, South Korea, Singapore, Hong Kong and the US, crack down on initial coin offerings (ICOs), should we expect to see a drop in the number of companies looking to raise capital via this route? So far in 2017, ICOs have raised over $3 billion.

According to Autonomous Next, in the first half of 2017 alone, over $1.2 billion was raised through initial coin offerings, "far outstripping venture capital investment into Blockchain and Bitcoin firms."

ICOs by Category and Top 2017 Offerings
ICOs by Category and Top 2017 Offerings

For those unfamiliar with the term ICO, it's a digital stock certificate, similar to an initial public offering (IPO) but the crypto version. Essentially, an ICO is a way for a cryptocurrency businesses to raise funds without being hampered by the numerous and cumbersome steps surrounding a stock offering, which involve lawyers, venture capitalists and investment banks. As such, ICOs are an unregulated means by which funds can be quickly raised for a new cryptocurrency venture.

Recently, too, high profile celebrities such as boxing champion Floyd Mayweather, rapper Ghostface Killah and socialite and media personality Paris Hilton have all endorsed ICOs. The Securities and Exchange Commission (SEC) has warned celebrities to disclose paid endorsements of ICOs they've promoted.

At the beginning of November, the SEC warned:

“Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws. Conduct research before making investments, including in ICOs. If you are relying on a particular endorsement or recommendation, learn more regarding the relationship between the promoter and the company and consider whether the recommendation is truly independent or a paid promotion. For more information, see an Investor Alert that the SEC’s Office of Investor Education and Advocacy issued today regarding celebrity endorsements.”

Trace Schmeltz, a partner in the Chicago and Washington, D.C. offices of Barnes & Thornburg LLP, believes the SEC scrutiny into the ICO market is good for investors, although it will certainly slow the pace of tokenized fundraising.

According to Schmeltz, ICOs have became increasingly popular because they appeared to hold the promise of easy access to capital, in exchange for a virtual token with some desirable function. He highlights for example, Playkey, an online gaming company. The company is presently raising money by selling tokens that will allow holders to access high powered computer systems for gaming.

But much like stocks, getting in at the initial coin offering isn't always a guarantee of asset appreciation. Schmeltz warned:

“The tokens from these offerings can appreciate in value either because they are limited in number or because they are tied to the growth of the issuer’s enterprise. The Securities and Exchange Commission has deemed the latter kind of token to be a security. Accordingly, any entity seeking to offer tokens reflecting the value of the enterprise needs to follow the listing requirements under the Securities Exchange Act of 1934.”

The expense and effort involved in this fundraising process has slowed within the ICO market, says Schmeltz. “In our firm, entities seeking to conduct initial coin offerings often drop the idea once confronted with the time, expense and effort it will take to meet the Exchange Act’s requirements. The retrenchment in the ICO market is likely a good thing, however.”

Case Study: Tezos ICO

One now notorious case involves the cryptocurrency Tezos, the technology project that raised $232 million via an ICO in July. It was considered a mammoth and successful offering at the time, but the company has since been discredited, and a class-action lawsuit has been filed against its organizers, alleging that it violated US securities laws while also misleading investors about the company. Reuters, citing a lawsuit filed on October 25 in California Superior Court, San Francisco, argued that the people behind Tezos violated U.S. securities laws and defrauded investors because no digital coins have yet been issued and "participants were told they were making a donation and may never receive any."

Schmeltz explains:

“Tezos’ recent initial coin offering, for example, was not registered under the Exchange Act and raised approximately $230 million in US dollars. The offerers reportedly consider each investor to have made a “non-refundable donation,” rather than an investment. Now, there are rumors that the Tezos project is stalled by infighting and that reports of the adoption of its blockchain technology are greatly exaggerated. If the project fails, the investors may have a difficult time pursuing recovery from the offerers.”

Additional major concerns regarding ICOs?

There are a number of key red flags Schmeltz points to:

“To begin with, startup companies may lack the type of controls and corporate governance needed to ensure that money is used for business purposes. Some have nothing more than a good initial idea, without the needed follow through to execute on that idea. As a result, fundraising by such companies without the disclosures required under, or the protections provided by, the Exchange Act can leave investors open to significant losses.”

“The strictures of the Exchange Act are intended to protect investors. The disclosures required by the Act provide critical business information needed to make an intelligent investment decision. Furthermore, the Act requires that offerers avoid materially false statements while raising money—including exaggerations of product adoption or technological success.”

Not everyone believes increased regulation and governmental crackdowns are hampering the ICO marketplace. Sol Lederer, Blockchain Director of LOOMIA, a technology company currently focused right on textile innovation, says that according to icoalert.com there are now more ICOs than ever. He makes the point though that there 5-10 per day but that funding expectations have changed:

“However, the combined amount being raised is less than it ever was. The quantity of ICOs may be negatively impacting investor enthusiasm since they now have a harder time picking winners. The main reason, however, for the lack of enthusiasm is that the price of ether has leveled out, so there are no profits to redistribute into ICOs. When ether sees another run-up, there will once again be large investments into ICOs."

Cancerous Growth?

One critic compares the uncontrolled growth of ICOs to the spread of cancer. Shidan Gouran, president of Global Blockchain Technologies, an investment firm providing clients with access to a basket of holdings within the blockchain space, says that's the name for an uncontrolled growth without checks and balances. He's negative on the current situation but believes things will improve as the regulatory environment strengthens:

“My optimism is for the long term, and we need some control in this space to prevent fraud and maintain the community's confidence, which is why I welcome regulatory oversight. It will slow down the pace of growth but is necessary if the technology is to maintain its usefulness and potential of turning strong social networks — and by that I mean any strong network of users — into efficient and autonomous markets. Those digital assets will be survivors. So far, most Western and Eastern regulators have been very reasonable on their stances, and I'm as optimistic as ever. Good regulatory initiatives will survive and bad ones that don't benefit their respective constituents will not.”

As global lawmakers move in on the Digital Wild West and introduce more carefully thought out checks and balances, the number of ICOs may drop, at least at first, but if future offerings are successful and investors satisfied, the growth horizon will no doubt expand accordingly.

Is Ramped Up Government Scrutiny Killing Initial Coin Offerings?
 

Related Articles

Is Ramped Up Government Scrutiny Killing Initial Coin Offerings?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
B.G. Tercero
B.G. Tercero Nov 07, 2017 4:53AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The vast majority of ICO's are scams that never had any intention of doing anything else but scam.  That's why I say to Congress and the SEC: Don't pass any new laws targeting ICOs!  Don't promulgate new regulations on ICOs!. . Instead of wasting 18 months reading the blockchain Wikipedia article and then hiring outside lawyers to write new laws that benefit no one but lawyers, here is a radical suggestion:. . ENFORCE A LAW!. . A law. Singular.  One specific law. You don't even need to read the federal statutes because it's so short you can memorize it.  Ok here it is.  Ready?. . Fraud.. . Got that?  That's it!  Go enforce a law called fraud.  Actually, why don't first scrap the entire securities statutes and replace it with this:. . Securities Act of 2017. Chapter 1 Section 1. Part 1 Sub 1. . a.)  No fraud.. . Done. And here is the corresponding SEC rule to enforce:. . Anyone who wrongfully acquires anything of value from another person through dishonesty or deceit shall be guilty of fraud.
tony ooh
tony ooh Nov 07, 2017 4:53AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Tercero: you and the governments listed are exactly the reasons why bitcoin and other crypto will flourish, grow stronger. so, keep pounding the table. i have bitcoin, and those who do, never ever listen to folks like you nor pay attention to governments that chatter. so line up with the folks. you all shout the same chant. crypto is a store of value.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email