PROCEED WITH CAUTION: THE CURRENT STATE OF THE EVOLVING U.S. INITIAL COIN OFFERING LANDSCAPE.

• Author: Luvai, Kennedy K.
• Position: SILICON SLOPES

2017 registered a dizzying uptick in "initial coin offerings" or "token sales" (collectively, ICOs) as a means of funding early stage blockchain-related ventures. According to Coindesk.corn's ico-tracker, ICOs raised $38 million in Q1 2017, $797 million in Q2 2017 and $1.38 billion in Q3 2017. ICOs are on track to exceed the Q3 2017 total as ICO funding exceeded $1.25 billion in October and November 2017. Needless to say, ICO offerings have now far surpassed traditional venture capital as a means for funding new blockchain-related ventures.

WHAT IS AN ICO?

An ICO is a relatively new fundraising method through which virtual tokens or coins are created and distributed using distributed ledger or blockchain technology. These tokens may be denominated in fiat currencies or, more commonly, in cryptocurrencies like bitcoin or ether. After issuance, tokens may be resold in secondary markets and have their own market value independent of the cryptocurrency used on the associated platform.

Capital raised from the ICOs may be used to fund development of associated digital platforms, networks or applications, while granting the token holder some interest in the project. In other cases, purchased tokens may be used to access the digital platform or application, or otherwise participate in the project, once it is functional.

Thus, generally, tokens fall into two categories: "securities tokens" and "utility tokens." A securities token is analogous to a traditional security like corporate stock, LLC membership interest or partnership interest. A utility token is intended to facilitate access to a product or service on the digital platform or network thus deriving value primarily from consumptive use, meaning that it may be analogized to a gift card or software license.

UNCERTAINTIES SURROUNDING ICOS

In view of an uncertain regulatory environment, the accelerated rise in 2017 of ICOs as a fundraising paradigm for blockchain-related startups has elicited some notes of caution. ICOs have drawn criticism from some who contend that ICOs make it possible for issuers to bypass the highly regulated capital-raising process that venture capitalists, banks and underwriters are obligated to follow in IPOs.

Regulators in the United States and elsewhere appear to be concerned that ICOs, which usually involve innovative and highly technical projects disclosed in white papers, risk creating informational asymmetries between issuers and investors to the extent that...