What is an Initial Coin Offering (ICO)?
Similar to an Initial Public Offering (IPO), an Initial Coin Offering (ICO) (or token offering) is the way funds are raised for new blockchain based startup cryptocurrency offerings. Since cryptocurrency is decentralized, nearly anyone can launch an ICO given the use of the right technology. To create an ICO you would create a white paper detailing how the coin would work, ask for funding in either crypto or fiat money from people and in return you send them the coin or token you’ve created. Should this initial coin you created gain high circulation then the value of the coin will increase. As the creator of the coin, you have now created a new cryptocurrency that could rival other ICOs like Ethereum. When creating an ICO there are various legal documents that need to be reviewed and compliant.
How are Initial Coin Offers created?
Anyone can create an ICO with the right team and technology in place. Below are common steps taken to create an ICO.
Next, you want to develop a token. You can do this by either creating your own blockchain or fork an existing blockchain in which to program your token on. You’ll also want to set up and finalize your smart contract. The smart contract that exists on the blockchain will make automated transactions of your token between buyers and sellers with encoded preset rules.
As you’re developing your token, you’ll need to budget that token. Identify the funds you’ll need to raise though your ICO (hard caps or uncapped with fixed rates), consider conducting an ICO pre-sale to drum up enthusiasm, and allocate a number of tokens to founding and developmental teams.
What are the advantages to an Initial Coin Offering?
Initial Coin Offerings are high-risk and high reward. Below are the advantages to creating an ICO and making a high-risk investment in ICOs.
What are the disadvantages to an Initial Coin Offering?
Whether you are newly investing in ICOs or a seasoned investor, it is important to understand the disadvantages to ICO investments.
Initial Coin Offering Use Cases
Initial Coin Offerings ultimately use a crowdfunding based model in the crypto world that helps entrepreneurs and startup businesses raise capital for business development and growth. The investors who get in on the ground floor of a successful ICO will benefit in the long run. Examples of successful ICOs include:
- Banco – Bancor enables crypto investors to participate in an open-source financial marketplace. Bancor’s ICO generated over $150MM in digital currency.
- Ethereum – Ethereum powers the cryptocurrency ether (ETH) and decentralized applications. Ethereum’s ICO generated over $17MM in digital currency.
- Filecoin – Filecoin is a decentralized data storage network secured by blockchain technology. Users can access servers and share storages in exchange for Filecoins. Filecoin’s ICO generated over $250MM in digital currency.
- NEO – NEO utilizes decentralized commerce and smart contracts. NEO’s ICO generated for nearly $71MM in digital currency.
- Sirin Labs – Sirin Labs created a blockchain smartphone enabling secure crypto transactions. Sirin Labs’ ICO generated over $155MM in digital currency.
- Sorj – Sorj is cloud storage decentralized. Instead of storing files in on-prem data centers, Sorj encrypts files and stores data in a global cloud network. Sorj’s ICO generated $30MM in a week in digital currency.
Why do I need legal guidance on ICOs?
Entrepreneurs looking to hit it big with the next, new ICO are aware that there is big risk and big reward. It’s best to err on the side of caution legally when dealing with such high risk from both a documentation standpoint and Securities and Exchange Commission (SEC) compliance standpoint. Here is a list of the possible paperwork that is legally required or will require legal review for an ICO.
- Articles of Association – A document that defines the company’s purpose and operations
- Business Structure – A legal document that indicates the type of business you are establishing (e.g., sole proprietorships, partnerships, corporations, S corporations, and Limited Liability Company (LLC)) Certificate of Incorporation – A legal document necessary to form a corporation or company
- Employment and Services Agreements – A contractual agreement for independent contractors to work on specific projects
- Intellectual Property – Legal documentation to protect and register copyrights, trademarks, patents, business names, ICO names, and domain names
- Legal Disclaimer Clause – A disclaimer that protects you against liabilities from the ICO
- Tax Regulation documents – Regulations in place if there are necessary taxes due on the ICO
- Token Sale Agreements/Contracts – An agreement between the buyer and the seller of a token
- White paper – A detailed document that describes every aspect of the project in great detail. Details can include but are not limited to market analysis, business strategy, goals, technical architecture, information on the coin and how it will be distributed, legal issues, a description of your team, and list investors and advisors
If your ICO is a security offering, then it may need to register with the SEC as well as develop some other documentation. To stay compliant with the SEC, legal requirements may include:
- Register with the SEC
- Create Know Your Customer (KYC) Policy and Procedures documentation
- Create Anti-Money Laundering (AML) Policy and Procedures documentation
Glossary of Important Terms
Here are some important terms to learn when it comes to Initial Coin Offerings: