Dec. 15, 2016

by Tim Zagar and Jani Valjavec

The current popularity of initial coin offerings, a common fundraising method for virtual currency and blockchain-related funding campaigns, is understandable, since they look too good to be true. Last month, we reviewed the process for raising funds with an ICO. But will the popularity last?

For the entrepreneur, an ICO is the easiest way to raise funds. It does not matter who you are, where you are, what race, or how old you are. If you have a good idea and can present it well, you will get the attention of investors worldwide.

Blockchain technology coupled with an ICO allows total scalability, so it is all the same regardless of whether you get 10 or 10,000 investors. You can pitch it to decentralized, small and big investors worldwide. With thousands of people chipping in a few hundred dollars' worth of cryptocurrencies, no one really bothers to "look under the hood" as much as someone investing millions of dollars in a venture capital fund.

ICOs are hot now

For investors, ICOs present the hottest speculation opportunity around right now. Early ICOs consistently produced 10 times ROI in mere months, so what could be sweeter? It is not just gambling, though. Before the ICO era, investing in disruptive technologies in the very early stages was not possible. Facebook, Android, Uber – those are the big stories where it was impossible to invest during the early stages of development.

It was either technically not possible or reserved for "big investors" only, who in turn, reaped all the profits. Now everyone can become a venture capitalist, without any of the hassle and capital requirements.

With technologically revolutionary ideas that promise the disruption of the biggest platform players, it will certainly be an interesting ride.

The euphoria cannot last

When something looks too good to be true, it probably is. The euphoria cannot last forever – projects will soon start failing and investors will be getting severely burnt. Once this happens, the first standards for the due diligence reviewing of ICOs will emerge.

At Iconomi, we are already working in this direction. In order to pick the most promising ICOs for our investment fund, we need to do meticulous ICO assessments. We are developing guidelines for the development of the ICO 2.0, which will need to include something that ICOs so far have rarely produced – a higher level of transparency, a clear business proposition, a sound business plan, regulatory compliance and better control mechanisms for investors.

Nevertheless, cryptocurrencies and app tokens are in their infancy with the total crypto market cap around $13 billion, up from last year’s $6 billion, and $5 billion in 2014.

Cryptocurrency investors understand that we are at the beginning of blockchain technology going mainstream, and any "bet" in the form of an ICO that sounds good could be the golden ticket.

Are ICOs regulated?

Are there regulations that apply to ICOs?

This topic has been the subject of much debate recently because it is such a complex matter and is therefore impossible to answer in a sentence or two. As national borders are being "breached" in a plethora of new ways, jurists are caught somewhat struggling with the legislation of ICOs, which really are a wonderful basket of a lot of different ingredients.

In law, there are generally different principles and collision rules used to determine jurisdiction, but even those can lead to conflicting results (it is not unusual that several jurisdictions are competent at the same time).

The first step in discovering which regulations apply to a certain ICO is to determine which jurisdiction(s) apply. If we are lucky, the jurisdiction will be determined in the legal document that is the basis for the ICO (which of course doesn't exclude other states from claiming their jurisdiction).

After we have determined which jurisdiction(s) apply, we have to familiarize ourselves with all the pertinent legislation of that jurisdiction (for example: tax legislation, crowdfunding legislation, commercial code, penal code, etc.).

Unfortunately, no country has yet instituted ICO-dedicated legislation, so we have to employ various methods of judicial interpretation in order to arrive at a useful conclusion.

 

Jani Valjavec (left) and Tim Zagar (right) are cofounders 
of Iconomi, a Slovenia-based fund management platform 
for blockchains and virtual currencies.

 

 

 

 

 

 


Topics: Cryptocurrency, Venture Capital


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