Initial Coin Offerings (ICOs) made their first appearance in 2015 and raised over $6 billion for startups in 2017. Early figures suggest that these remarkable figures will be surpassed in 2018, leading many to ask what are ICOs, what’s driving their growth and whether they represent a genuine investment opportunity or merely a speculative bubble. 

ICOs are a means by which startups are capitalizing on the ongoing craze for cryptocurrencies. Instead of issuing equity – or rights to future cash flows of the company – ICOs instead issue ‘tokens’ (cryptocurrency specific to a particular firm). There are two types of tokens issued at an ICO: utility tokens and security tokens.

Utility tokens provide discounted access to the goods or services that the startup will provide. Alternatively, security tokens represent a form of equity in the company should it achieve regulatory clearance. Buyers of these tokens are first speculating that the startup will be successful and second, that the SEC will provide regulatory clearance to the startup so that their security token becomes equity.

It this all sounds risky, it is. A February 2018 Fortune article[1] cited data which showed that nearly half of ICOs failed in 2017. However, the figure doesn’t seem extraordinary when one considers that startups backed by traditional financing suffer similar attrition rates. Might there be something to ICOs afterall?


It seems difficult to believe now but there was a time when the price of Bitcoin – the world’s most well-known cryptocurrency – wasn’t in the thousands of dollars. In July 2013, the price of one Bitcoin was around $110. The price had risen over $100 in about 12 months, drawing considerable media attention at a time when stock markets were flattening out.  

Investors began to take notice. And if one cryptocurrency had been so successful, why not others? Capitalizing on the rising sentiment for cryptocurrencies, Mastercoin held the first ICO in July 2013, exchanging its own currency for units of Bitcoin. In total, it raised 5,120 Bitcoins with a total value at the time of around $500,000.[2] The ICO was born.  

Several others soon followed. Maidsafe raised $7 million in April the following year, while Ethereum raised $18 million just three months later in July 2014. By April 2016, the DAO raised $150 million at its ICO.[3] For startups everywhere, ICOs now looked a viable option for raising capital without many of the challenges of traditional financing.  

Unlike traditional financing, for example, ICOs don’t require financial statements and almost without exception, are subject to no regulatory oversight. In fact, broadly speaking the only requirement is a ‘whitepaper’ (i.e. the offering memorandum). The question then, is what do investors receive from ICOs, which regular investing channels don’t provide them?

Buying into the Hype

There is no one answer to what investors receive in an ICO, which makes the task of regulating them more difficult (and by extension, makes them more risky for investors). Whereas an IPO allows the public to acquire equity in newly-listed companies, ICOs rarely if ever provide guarantees on companies’ earnings or even voting rights.  

As Ollie Blears, an Associate at Allen and Overy LLP notes: “Rights can vary wildly between different tokens issued pursuant to different ICOs but common examples can include access to services or products developed by the start-up (often at a discounted price), use of the start-up’s software application [or] the right of redemption at a profit.”[4]  

In this regard, despite the similarity in name to IPOs (which may be an attempt to provide ICOs with some much-needed credibility), ICOs are more similar to crowdfunding campaigns than IPOs. And while there may be cases where investors have legitimately made exorbitant returns, the world of ICOs has also suffered from its fair share of fraudulent activity.

Fraudulent Activity in ICOs

Research by Chain Analysis, a New York-based firm that analyzes transactions and develops anti-money laundering software, estimates that around 10% of participants in ICOs end up as victims of theft. By August 2017, they estimated that ICOs had generated approximately $225 million in criminal losses. And with few criminals being tried, the incentive to steal presumably increases.

The case of PlexCorps, and what it allegedly got up to, is a case in point. In a wide-ranging whitepaper, it claimed to be faster and cheaper than Bitcoin. It promised participants in its ICO returns of nearly 1,500% in just a month and to have dozens of employees in offices across the world. None of it was true and investors in its ICO got badly burned.[5]  

FINANCE: Initial Coin Offerings (ICOs) enter the mainstream
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The example of PlexCorps is just one of a series of ICOs, which were dogged by crime of some form. In June 2016, $55 million worth of ether virtual currency was stolen from DAO straight after its ICO in the largest case of theft to date. The anonymity of cryptocurrencies also has the downside of allowing the thieves to mask their identity after they’ve committed the robbery.

According to Chainalysis, there are essentially four kinds of crime which affect ICOs and cryptocurrencies in general: phishing (gaining personal data from victims by claiming to be a trusted company), exploiting (taking advantage of a system weakness), hacking (gaining unauthorized access to data) and ponzi schemes (the well-covered pyramid schemes which require new users to come on board to pay existing members).  

With ICOs overtaking VC finance as a means for funding in the United States in some months in 2017, the SEC understandably began to take notice. Jay Clayton, the SEC chair said in February 2018 that he believed cryptocurrencies were essentially shares (and thus ICOs were share issues) and should be regulated as such, opening up the potential for a wave of regulation in the ICO industry.

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A wave of regulation in the ICO Industry

The crackdown by the SEC on ICOs is already having an impact. A March 2018 Reuters article[6] notes that companies holding ICOs are “increasingly filing their ‘initial coin offerings (ICOs)’ with the SEC, adding customer checks, barring U.S. investors or halting fundraising after the regulator said it will hold most token offerings to the same standards as share sales.”

The United States is not alone in its movement towards regulation with several other countries announcing similar initiatives. In February 2018, Gibraltar announced plans to become the first country in the world to have a bespoke set of regulations for ICOs and also called on the next meeting of the G20 bloc of nations to hold a discussion on cryptocurrencies.

Gibraltar’s rules will be closely watched by countries like France, Great Britain and Singapore who have all made noises at various stages about the importance of implementing regulation for virtual currencies. When released, the Gibraltar guidelines on ICOs may become the blueprint on which other countries develop their own regulatory frameworks. Either way, its release will be another significant landmark in the remarkable history of ICOs.

The future of ICOs

What shape regulation for ICOs take in Gibraltar and elsewhere will have a significant bearing on how the future of ICOs pans out. Even if there are already thousands of startup ventures which have been funded by ICOs, it’s important to recall how young the industry is: Less than five years old – similar to where joint stock companies were at the start of the 17th century.

The next big step in ICOs after regulation would appear to be the arrival of institutional finance. A December 2017 Bloomberg article[7] said December that Goldman Sachs were considering opening a cryptocurrency trading desk – a story later rebuked by the firm whilst admitting that they had already traded cryptocurrencies. If one such bank were to begin, many others would follows. 

The end game for ICOs then, depends on whether one is taking a bullish or bearish perspective. The bulls say that they’re the ‘future of finance’ and at some point in the future, maybe even an alternative to IPOs; the bears say that cryptocurrencies represent the worst of human folly and the greatest asset bubble the world has ever known.

Fortunately, there is undoubtedly some good news for both sides of the equation. The technology which has been developed around blockchain and even ICOs has applications in other fields such as security, banking, file-sharing and government-related processes. ICOs is likely to have a lasting impact well past the startup companies that they were intended for.