The famous Initial Coin Offerings, or as we all know them by the acronym “ICOs,” is a new practice of raising capital for early-stage ventures. It is, somehow, a substitute for more traditional sources of start-up funding. These types of financing are angel finance and venture capital (VC).
In an Initial Coin offering, tokens, or cryptographically secured digital assets, are sold by a blockchain-based issuer. The ICO calendar provides traders insight into new trading opportunities.
If they are well designed, Initial Coin Offerings can provide more liquidity, transparency, and security than any other conventional financing instruments.
The eruptive growth of the ICO market in 2017 and 2018
It’s no secret that ICOs are considered a phenomenon of the worldwide networks of distributed ledgers and open blockchains that began with the launch of Bitcoin in 2009. Today they include thousands of digital assets.
During 2017, and 2018 the ICO market has managed to grow explosively. According to one specific estimate between January 2016 and August 2019, Initial Coin Offerings raised over 41 billion dollars. At least 20 ICOs have taken in approximately more than $100 million individually.
During that same time, the ICO market has become flagrant for jokes, frauds, and scams. Entrepreneurs, regulators, and investors from all over the world have developed an interest in its novel characteristics and growth.
Legal Status of Initial Coin Offerings tokens
Cryptographic assets have given rise to an enormous amount of legal uncertainties due to their novel design. In the beginning, the fundamental problems about regulatory questions were how to account for crypto assets as one part of a company audit.
Another very essential and still pending issue is whether the tokens sold in an Initial Coin Offering creates potential capital gains liability for investors and income tax liability for the promoter.
A great majority of these tokens could have the legal status of commodities, which then implicate a federal regulatory regime. Some of these token issuers could be construed as money transmitters. It’s a status which in America, for example, requires state-by-state registration and compliance obligations.
Perhaps the most crucial question regarding ICO tokens and their legality is whether they possess the status of securities and should risk and delay for issuers.
How did the United States bring regulatory clarity to its ICO market?
To bring regulatory clarity to the United States, Initial Coin Offering market, in October 2018, the SEC has managed to create a Strategic Hub for Innovation in Financial Technology. It was designed to serve as a resource for public engagement on the FinTech issues of the SEC.
In April 2019, the same group published a memorandum that specified “whether sales and offers of digital assets are securities transactions” under the famous Howey.
Besides the United States of America, other countries have also adopted various regulatory stances toward the Initial Coin Offerings. These stances include blanket prohibitions in China and South Korea to accommodate safe harbors in Singapore and Switzerland.
It’s important to note that if a country can enforce its securities laws and tax against an ICO issuer, it is not always clear. It is because Ethereum and other public blockchains operate everywhere. They aren’t anchored physically in any of the given jurisdictions.