every day sees fresh news of a wildly successful ICO (Initial Coin Offering) or token sale.
June 13th saw blockchain startup Bancor raise over $US150 million in just three hours as "investors" bought into their vision of a 'smart token' that creates fully liquid markets for other blockchain tokens.
But Bancor is far from alone in raising funds through the booming ICO mechanism. Research by Coindesk shows that, even before Bancor, ICO's had raised more than $US327 million compared with $US295 million for traditional venture capital investments into blockchain startups.
Numbers like these vindicate the arguments of proponents of ICO's. They represent a phenomenally efficient way for start ups to raise funds. Equally important, they democratise access to venture capital investments. For the first time, ordinary small time investors have an easy way to participate in these opportunities.
Yet that same ease of access and the lure of apparently enormous returns means that regulators must turn their attention to the ICO sector. Caveat emptor is a fair principle for sophisticated investors with access to detailed information. Is it the same standard that should apply for ordinary investors?
There are at least four key questions that regulators and policy makers should consider:
- exactly what 'rights' does participation in an ICO confer? If ownership of a token does not represent an equity stake in the business, just what is it?
- what is the appropriate level and form of disclosure to potential participants in an ICO?
- what is the right standard for governance of an ICO?
- what mechanisms exist to protect against market manipulation?
Principles of existing securities law have evolved over the last century to answer just these issues. Understanding just how they should apply to the new ICO sector and regulating accordingly will allow this new, more efficient and more fair fundraising mechanism to continue to grow while providing appropriate protections for ordinary consumers and market participants