Is An Initial Coin Offering a Security?

Initial Coin Offerings (ICO) News

by DailyCryptoInfo 307 Views

Is An Initial Coin Offering a Security?

Initial Coin Offerings (ICO) News

by DailyCryptoInfo 307 Views

In most cases ICO crowdfunding is a way to create equity surrogates so “initial coin offerings” should be considered and regulated just as ordinary sales of equity or debt. Over the last couple of quarters, dozens of these next-gen crowdfunding campaigns have been raising more than $50 million per month. None of that money came from venture capitalists and none of those investment offerings were regulated by the SEC or similar non-US authorities. The funds came from regular people who used their bitcoin and ether to support projects in which they believe. That’s both cool and problematic.

There are two technical approaches:

One way is to peg a SAR (stock appreciation right) or a legally discharged phantom stock to a blockchain-based digital token.

Another way is to “digitize” company’s equities by reforming the entire legal entity operating under corporate laws into a so-called distributed autonomous organization (DAO). A DAO is essentially an online-run organization where some automated rules exist for:

  1. Tabling petitions or calls-to-action by achieving a threshold-quantity of upvotes
  2. Making decisions based on participants voting on petitions
  3. Implementing decisions by allocating budgets through blockchain-based multi-signature wallets.

Is An Initial Coin Offering a Security?

The cool thing about DAO is that it operates faster than a normal company due to the lack of various friction points. It is also less expensive. But most importantly, there’s no room for internal corruption. The latter reason alone should be sufficient for piquing the interest of stakeholders of most corporations. Selling DAO token is still selling equities so it has to be regulated the same way.


The said above is not true for some [rare] projects, though. Ethereum is one example. Project like that technically raise money by creating and then selling their own “native application” tokens/coins. What are these coins exactly?

Imagine creating a new island-nation that yet belongs to no one. You need funding for the infrastructure and protection of the new land from encroachments. A smart way to fund this would be to sell a currency of the new state to be used on the island where investors will receive citizenship and live. It makes a lot of sense because the land is only good if some economical activity takes place there, so you’re providing the blood for the body of the future economy. You invest into every piece of needed economy in one shot.

Such projects ARE NOT sales of equities or debt in their inner essence, so they should not be regulated with any existing approaches. Something completely new has to be applied because these projects ARE something completely new.

However, most of projects just can not claim any “naturally fitting intra-economies”. The rise of Bitcoin didn’t change anything here. The overwhelming majority of projects just pretend they need a coin with a sole reason to accumulate some “donations” in the form of coins sold during ICOs. That’s a huge problem. These projects draw attention away from true innovation and shadow good companies by spoiling the image of the entire cryptocurrency place.

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