Alongside Bitcoin’s meteoric rise in global interest and price has
been a frenzy of activity around initial coin offerings (ICO).
According to the online coin offering tracker Coinschedule, in 2017
alone there have been nearly 250 ICOs collectively raising over $3 billion.
This heightened interest combined with the potential for lucrative returns has
prompted fears in some investment circles that we are facing a bubble. Indeed,
the bubble seems to have already popped to some extent, with far fewer ICOs
hitting their target raises than they were a few months ago.
Today’s ICOs are being initiated by funding-hungry startups, often
with a blind eye toward any sort of regulatory due diligence. As a result, this
wild and reckless approach has raised the eyebrows of the U.S. Securities and
Exchange Commission (SEC) among other regulatory bodies worldwide. The SEC, in
fact, has opened a new cyber unit for cryptocurrency violations to address the
proliferation of these campaigns.
What’s problematic here is the lack of compliance guidance with
respect to ICOs relative to crowdfunding regulations or federal securities law.
This prevailing environment has ignited calls for stricter oversights
addressing scams and “pump and dump” schemes that are now infiltrating this
Startups have an enormous amounts of wiggle room when forming an
ICO token. Unfortunately, many of these campaigns are launched with little more
than a hastily constructed website and white paper with the company’s core
product rarely battle-tested by real users. This heightens the notion that reaching
cash rich startup status does not ensure product success.
Once acquired by investors, ICO tokens can then be exchanged in a
secondary market for liquid value. In the meantime, shareholders (mostly
founding members and lead developers) often lay claim to 10 or 20 percent of
the initial tokens tied to a vesting schedule. It’s the outside token investors
that are often at risk as they, at times, find themselves subjected to “pump
and dump” and other nefarious schemes, harming the overall integrity of the
Navigating the Ever-Evolving ICO Landscape
Wally Xie, CEO of Qchain, an emerging digital marketing, advertising and
analytics platform seeking to leverage the strengths of both NEM and Ethereum
blockchain protocol, said that that while know-your-customer (KYC) compliance
really hurt his company’s recent ICO, he felt that it was a necessary sacrifice
to make in terms of long-term legitimacy and the safe development of Qchain in
“We are finding that we
perhaps made the wrong move by targeting the cryptocurrency community at large,
rather than negotiating with ‘whales’ from the outset,” Xie said. “We’ve also faced
lots of legal challenges, such as having to do stringent KYC to comply with U.S.
regulations, since lots of money laundering is also happening in the space.”
Xie noted that similar
issues involving integrity and credibility are plaguing the industry his
company is taking aim at, namely, native advertising. He said that as that
industry’s expansion leads to improved
conversion rates compared to traditional web display ads, that has come at the
cost of trust found in traditional media outlets. This erosion of trust, he added,
has helped drive a flood of people toward “fake news” websites that
make their money in confirmation biases.
worried that a similar scenario may be emerging in the high stakes game of ICO
“The ICO space is definitely changing as it is becoming more of a
pay-to-play environment,” Xie said. “Successful ICOs now typically already
receive massive pre-ICO investment from folks like Draper, so the feasibility
of an ICO for all parties involved has definitely changed. In some ways, it’s
become a less democratic process. ICOs are becoming less accessible and
stratification is starting to happen in a manner similar to what occurs in any
Jordan Valentine, an expert
specializing in emerging technologies at Spitzberg Partners — a boutique corporate advisory and investment firm
headquartered in New York — believes that we are fast approaching the
end of the frontier days in the ICO space, if we haven’t gotten there already.
He noted that in 2017, we had seen four nine-digit coin offerings and billions
raised through ICOs. That, he said, is simply too much money changing hands for
regulators to allow this bubble to grow unfettered.
“Going forward, government
agencies will certainly look to be more present in the crypto world as they
develop an institutional understanding of the issues at hand,” Valentine said. “My
personal hope is for a regulatory framework that reins in some of the more
reckless activity in crypto without unduly burdening legitimate innovation.”
Valentine believes that
this reaction is already in motion in the U.S. In July 2017, the SEC clarified
its stance on ICOs, warning that coin offerings would be subject to U.S.
securities laws. This means that coin offerings will be judged by the Howey
Test — a legal precedent for determining whether a financial instrument is an
investment contract. For U.S. investors, this distinction connotes strict
income or net worth requirements, restricting the pool in the U.S.
“Digital coins can be used
to confer a wide range of rights in addition to value, so their application
under securities law isn’t exactly straightforward,” said Valentine. “Interest
in coin offerings will likely be tempered a bit in the short term, as would-be
investors wait for further regulatory clarity and watch as the first penalties
are doled out. However, the allure of finding a big win will be enough to keep
this fundraising mechanism relevant, barring a serious clampdown from
When asked about the prevailing
trend toward launching an ICO campaign without a demonstrated product or
service, Valentine is skeptical.
“An ICO backed only
by a white paper and a webpage is, in the best case, an incredibly questionable
gamble; in the worst cases, these raises are outright predatory, with the
organizers bailing as soon as possible,” he said. “Even in the case of a ‘good’
white paper ICO, buyers are taking on huge risk, as they generally do not
acquire any right to information or managerial discretion.”
But Valentine offers this
“While most coin offerings
are very much a long shot bet to the buyer, they’re not all scams. There are a
number of potentially paradigm-changing ideas supported by a token that merit
the attention of the savvy and adventurous.”
In response to sceptics, Xie said that Qchain made sure to have a fully-tested,
ready-to-employ platform in advance of launching its ICO campaign to avoid
giving the crypto industry a bad name.
“In terms of our product, we didn’t want to espouse a ‘break first/fix
later’ ethos that has come to dominate Silicon Valley, made infamous by such
companies as Uber and Zenefits,” he said. “Funding is critical, but the quality
of what we are delivering will always come first.”