ICO: A Risky or Safe Bet?


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2017 will be remembered as a record year for Initial Coin Offerings (ICOs) around the world. Thus far, 100 ICOs have raised over $ 1.3 billion. Currently, ICO funding has overcome angel and early-stage Venture Capital investments combined since this past July. In the second quarter of 2017, ICOs have raised the equivalent of $ 863,173,000, almost five times more than that which had been raised since they came on the scene in 2013. One of the largest ICOs this year was Tezos, which in July raised $ 232 million in both bitcoin and Ether. Needless to say, ICOs have existed for several years. However, due to the increasing value of digital currencies, the surging interest of investors, traders, and the media, has caused regulators around the world to pay increased attention to ICOs and to want tougher regulations. Regulators are now concerned due to the simple way of collecting money from investors, in particular, retail investors. In fact, companies usually announce ICOs in cryptocurrency forums and on website through a basic document that describes the project, the privileges granted to currency buyers and the key terms of the ICO, such as the timeline, accesso to the platoform, and more. The real issue is that many of these projects are set up without compliance.

Regulatory Issues

ICOs have taken myriad forms over the past few years, which has created a regulatory grey area. Some ICOs have been structured as the sale of virtual tokens that give the buyer access to the company's services. However, they do not provide any shares to the group. In other ICO cases, the trade is similar to the marketing of securities and has caused regulators to scrutinize these transactions very closely. 

Regulators are stepping up scrutiny in order to establish a framework within which companies should operate. Regulators in the US have warned investors about ICOs, describing how fraudsters use the lure of emerging technologies to push inexperienced investors to invest their money in a fraudulent scheme. In order to prevent that, the SEC (Securities Exchange Commision) has pointed out that tokens issued through ICOs should be regulated under securities law when tokens or digital coins meet the characteristics of a security, regardless of how tokens are named. However, the appropriate criteria determining whether a token is included within the definition of a security does not exist. There is no general rule; this depends on the jurisdiction in which offer is made. 

United States 

In the US, regulators apply the Howey test. In SEC v. Edwards (1946), the Court found that a transaction is a regulated "investment contract" if it involves an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others". Therefore, if an exchange trade token is classified as security, it will need to be registered with the SEC. This has led to two options. The SEC is allowing alternative trading systems to choose whether to register as national securities exchanges or to register as broker-dealers and comply with additional reguirements under the Regulations ATS, depending on their activities and trading volume.

United Kingdom

The UK's Financial Conduct Authority (FCA) released its Discussion Paper on Distributed Ledger Technology in April 2017. In this paper, the British watchdog underscored how the surge in speculative interest in ICOs has brought up the question whether the UK Financial Authority should apply rules which protect investors and state clearly what must be disclosed by an issuing company in reference to ICOs, based on the structure they have. The basic idea developed by the FCA set upa parallel structure between ICOs and IPOs (Initial Pubblic Offerings). Thus, depending on how the ICOs are structured, they can fall within certain regulatory parameters. Nonetheless, the UK authorities have shown appreciation for the innovations behind bitcoin, as one way to improve competition and to develop central banking services. They have warned about the need to introduce more regulatory scrutiny, though, for ICOs.


A different approach has been taken by the Chinese government. Chinese authorities have established that Initial Coin Offerings are illegal and a form of unapproved illegal public financing behavior which raises suspicions of illegal securities issuance and financial fraud. The Chinese Central Bank and seven other agencies introduced a ban on fundraising involving virtual coins due to the risk that this method of raising capital could throw the social economy into disorder, and this could disguise fraudulent activities related to money laundering and capital flight. Nevertheless, this halt does not seem to impede Chinese investors from investing in ICOs. In fact, an overseas legal entity could sell tokens in China, having a Chinese version of its website, circumventing the authorities' ban and allowing Chinese people to invest in ICOs if they so desire. 


Globally, ICOs appear to be under the microscope of regulatory authorities currently, but at the same time this investment vehicle offers a possible and valuable solution for financing. It seems that closer scrutiny is necessary and desirable; clearly, it is vital to distinguish between scams which attempt to engage in fraudulent activities with retail investors and those real value projects.  

Salvatore Pugliese avatar
Salvatore Pugliese

Salvatore Pugliese obtained his Master's degree in Law from the University Suor Orsola Benincasa in 2013. Afterward, Salvatore attended La Sapienza University in Rome, where he received a Master in European Private Law in 2015. After receiving his Master, Salvatore moved to Boston, where he graduated with an LLM in Banking and Finacial Law from the Boston University.