What to Know About Initial Coin Offerings
Initial Coin Offerings (ICOs) are attracting investors interested in new trends in technology investing.
Regulation of ICOs is evolving and complex. With considerably fewer investor protections than in traditional securities markets, investors considering participating in an ICO investment should be aware of the growing potential for fraud and manipulation these offerings present. Investors need to approach ICOs with extreme caution. ICOs are very risky and are not suitable for many investors. You could lose all of your investment. Before parting with your hard-earned money, make sure you know what you’re getting into.
What is an Initial Coin Offering?
An Initial Coin Offering (ICO), also sometimes referred to as an Initial Token Offering (ITO), is a method used by an individual, group of individuals or organization to raise capital for a planned project. Most ICO’s involve projects that are at the “idea” stage and in many instances may lack a prototype or “real world” implementation of the idea. To finance the idea or project through an ICO, promoters create a new virtual “coin” or “token,” which is then sold online to participants in the ICO in exchange for fiat currency, such as the U.S. or Canadian dollar or Mexican peso.
The facts and circumstances of each ICO are different. For example, if the ICO is considered to include the offer and sale of securities, the offer and sales of the coins or tokens in the ICO must be registered with appropriate securities regulators or have an exemption from registration. Most exemptions require sales only to accredited investors, or those with net worth of more than $1 million. Use extreme caution when dealing with promoters who claim their ICO offering is exempt from securities registration yet does not ask about your income, net worth or level of investing sophistication.
Before participating in an ICO, potential investors should ask whether the “coins” or “tokens” are considered securities and whether the offering itself has been registered with appropriate securities regulators. If properly registered in the United States, free information about the offering is available on the “Form S-1” in the U.S. Securities and Exchange Commission’s online EDGAR system. Also, virtual “coins” or “tokens” considered to be securities must comply with securities laws, which require the individuals or firms selling them to be licensed or registered with securities regulators. Potential purchasers can check the registration status and background of those selling “coins” and “tokens” by contacting their state or provincial securities regulator or by visiting Investor.gov.
While some may tout ICOs as a new form of crowdfunding, it is important to remember that crowdfunded offerings must comply with the requirements of the federal Regulation Crowdfunding and securities laws in general. It also is important that potential participants understand that an ICO should not to be confused with an Initial Public Offering (IPO), which requires potential offerings to undergo a very rigorous and robust process before they can attempt to raise capital on regulated securities markets.