What is an ICO

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ICO stands for Initial Coin Offering and is, in very broad terms at least, the cryptocurrency equivalent of an Initial Public Offering (IPO) where shares in a company are publically listed on a stock market. In the case of an ICO, it is a cryptocurrency token which is sold to investors rather than a share. As cryptocurrencies such as Bitcoin have become more widely accepted, ICOs have started to become commonplace. Bitcoin itself, probably the best known cryptocurrency, is now 9 years old having been created 3 January 2009. 

In a traditional IPO, a company issues shares in itself and investors buy them at a price determined largely by supply and demand. Having bought the shares, investors are part owners of the company and the company is able to use the funds received to invest in its business. 

In an ICO, a new cryptocurrency is created and the company encourages investors to buy the currency at a certain price and normal market forces apply. Investors can then exchange the new cryptocurrency into a more recognisable cryptocurrency (such as Bitcoin) or into Dollars, Sterling etc on a currency exchange. Like an IPO, the ICO therefore represents a way for the company to raise funds to invest in its business. What the investor receives however is typically not part ownership of the company (ie is not a “share”) and therefore the ICO does not dilute the existing owners of the company. This enables the company to raise funds on a project by project basis if it believes there is demand in the market to fund them. ICOs are in essence a type of crowdfunding.

One of the problems with ICOs has historically been the lack of transparency and regulation. The world of IPOs is extensively regulated, particularly in the major markets such as New York or London and therefore investors are able to rely on a certain degree of disclosure and on rules to protect them. 

In the case of ICOs, it is only quite recently that jurisdictions have started to address how they might regulate them in the light of their traditional legal frameworks. The US has progressed most in this regard, with jurisdictions as diverse as France, Gibraltar, New Zealand and Switzerland all having released new rules in the last six months. Some countries such as China and South Korea have banned them entirely. One of the fundamental issues to address is that the cryptocurrency funds raised by a company in an ICO are unlike the country specific funds (be they Dollars, Euros, Renminbi etc) raised in an IPO which are regulated by a specific central bank. Needless to say, tax and VAT rules have not yet expanded to deal with the new realities and therefore first principles, case law and statute must be applied as best one is able.

As ICOs become more mainstream (and more regulated) it seems likely they will increase in popularity. Whether they will ever threaten IPOs as the fundraising tool of choice for growing businesses remains to be seen. In 2017, it’s estimated that ICOs raised a mere 2% of the sums raised by IPO. 

 

This is part of an occasional series of articles by our Technology Team. If you would like speak to someone about this, please contact your normal Hiller Hopkins contact.