Kurt Wildermuth, Lawyer
Commonly referred to as an ICO, an Initial Coin Offering is a new form of fundraising that allows companies to take advantage of “cryptocurrencies” to raise large amounts of capital and fund projects.
Similar to an Initial Public Offering (IPO), an ICO allows investors to purchase new forms of cryptocurrency colloquially referred to as “coins” or “tokens” from the seller business using an existing cryptocurrency (such as Bitcoin) for a set period of time, at a set price. The purchase of these coins usually fund projects of the seller business, including the development of the new cryptocurrency or other technology-related ventures. The company keeps all the money initially raised through this sale and the investor hopes that the price of the currency will increase – allowing them to sell their investment at a later date for a profit. For the cryptocurrency to be worth anything, the company offering the coin needs to succeed.
Largely unregulated, ICOs allow businesses to bypass the usual rigorous and regulated funding pathways such as venture capital and banks.
How does an ICO differ from an IPO?
Where investors who fund companies via an IPO and receive shares in that company along with the associated right to vote and receive dividends; ICO participants holding coins gain none of these rights, only the ability to sell their coins in the future (also hopefully for a profit).
In addition, prior to raising capital via an IPO, a company has various Australian Stock Exchange Listing Rules and corporate legislation to which it must comply, which will vary depending on the exchange and country it intends to list in. At present, generally, ICOs are currently subject to no such rules or legislation and therefore, there are few hurdles or disclosure obligations to manage ICOs or protect investors.
What is ASIC’s position on ICOs?
The Australian Securities & Investments Commission (ASIC) released Information Sheet 225, providing the regulators guidance on the application of the Corporations Act 2001 (Cth) (Corporations Act) on the issue of coins.
Generally, ASIC have noted in Information Sheet 225 that the legal status of an ICO is dependent on the circumstances of the ICO, considering such things as the structure of the ICO and the “rights” attaching to the coin being offered through the ICO. ASIC have offered guidance on when an ICO:
1. may be classed as a managed investment scheme – e.g. where the value of the coins acquired is affected by the pooling of funds from contributors or use of those funds under the arrangement;
2. may be characterised as an offer of traditional shares in a company – e.g. if the rights attaching to the coins are similar to the rights attaching to a share the issuer will be required to prepare a prospectus;
3. may be characterised as an offer of a derivative (for example, an option or future) – e.g. ICOs offering coins that derive their price from other financial products or underlying market or asset prices that move in a direction before a time or event; and
4. could become a financial market or crowd-sourced funding platform.
If an ICO falls under any of the circumstances above, an ICO may be subject to the Corporations Act.
What are the potential risks of an ICO?
Participants need to be aware of the risks of wrongly assuming ICOs are unregulated and that they are not financial products. ASIC’s Information Sheet 225 serves as a timely reminder that this may not be the case and is dependent on the rights attaching to the coins.
We recommend you seek advice if you are seeking to undertake or participate in an ICO.
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