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This paper examines initial coin offerings and the evolving regulatory landscape governing offerings of digital assets. An initial coin offering (“ICO”) is the process by which an organization creates and issues crypto-coins, also referred to as tokens, that are necessary to fund
Oct 14, 2019 · Despite its design shortcomings, ICOs remain alluring. Since taking off in 2017, the initial coin offering market has topped $22 billion in 2018, challenging the traditional ways of raising ...
- Overview
- ICOs as an Investment Opportunity
- How Initial Coin Offerings (ICO Work
- Key Differences Between ICOs and IPOs
- Risks and Challenges of ICOs
- Evolution of the ICO Market
- Considerations for Financial Advisors
- When Should an Advisor Endorse or Recommend an ICO to Clients?
- What Blockchain Platforms Are ICOs Most Often Built on?
- What Are Secure Token Offerings?
Initial coin offerings (ICOs) are a fundraising model for startups and crypto projects. These ventures raise capital by issuing digital tokens or coins in exchange for
investments. ICOs remain highly speculative, and many operate beyond regulatory oversight.
As an investment advisor, it is crucial to have a solid understanding of how ICOs function, their inherent risks, and the evolving regulatory landscape.
Are your clients interested in crypto? Use this discussion guide.
are a method of funding that involves issuing digital tokens in exchange for cryptocurrency.
Financial advisors need to understand the risks and regulatory considerations associated with ICOs.
For clients interested in cryptocurrencies, ICOs may be an attractive early investment opportunity in a disruptive technology. However,
have an obligation to ensure that clients fully grasp the risks involved and that their ICO investments align with their broader financial goals and risk tolerance. You can then set client expectations and uphold your
even in a newer investment area like cryptocurrency.
and a measured approach, advisors can navigate the fast-moving ICO landscape on behalf of their clients to give them prudent advice. This remains a “buyer beware” market still needing maturation and regulatory clarity. In the interim, advisors must vigilantly assess each offering and emphasize transparency with clients above all else.
The process for conducting an ICO often involves the issuer releasing a document known as a
detailing the project, goals, timeline, and use of funds. The white paper serves as an informal prospectus to attract potential
Once the white paper circulates, the issuer sets a date for a token sale to exchange newly created crypto tokens for established cryptocurrencies such as Bitcoin or ether, usually with the expectation that the tokens being offered will increase in value as the network and demand grow. The tokens are stored in
and are typically based on
These provide their holders with future access to a product or service on the platform being developed. Essentially, they grant usage rights or the prospect of such rights.
These entitle holders to an investment
of company shares to the public,
differ considerably concerning their regulation, structure, inherent risks, and investor rights. Here are some key differences:
IPOs must adhere to strict rules in the
, which requires company disclosures, financial statements, liability for misstatements, and registration with the U.S. Securities and Exchange Commission (SEC). ICOs, meanwhile, mostly operate outside this framework.
like investment banks conduct thorough due diligence, receive fees, and act as gatekeepers to the public markets while marketing new shares to early investors. ICOs have no intermediaries screening or validating their offerings. Instead, the investing public must do their own research and build trust in the issuer, which directly markets the tokens.
Stocks bought in IPOs represent equity ownership in a company’s assets and entitle shareholders to residual profits, voting rights, and the potential for dividends. ICOs rarely confer such rights, as they are typically utility-based tokens granting platform access and usage rights—or nothing at all.
Given the lack of mandatory disclosures, regulations, and standardization, ICOs present a high risk of fraud, misrepresentation, and cybersecurity breaches. Advisors should warn clients of potential red flags like statements guaranteeing high returns, fake founder credentials, plagiarized white papers, or pressure to invest quickly.
While many ICO issuers publish white papers, websites, and project details, there are no requirements for audited financials, disclosures of conflicts, or background checks. Therefore, an elevated risk of fraud or misconduct exists in ICOs.
While many ICOs are legitimate, the largely unregulated arena has been the target of numerous instances of fraud. Here are a few of the most notorious examples:
was promoted as a new cryptocurrency that would yield high returns. However, it was eventually revealed to be a
In the 2010s, ICOs emerged as a method for blockchain-based startups to raise capital outside the traditional venture capital model. They were enabled by the increasing popularity and acceptance of cryptocurrencies, especially bitcoin and ether. The first notable ICO was for Mastercoin (now Omni) in 2013, which raised $5 million, an impressive figure at the time that demonstrated the potential of this new fundraising mechanism.
Over the next few years, the ICO landscape grew rapidly, culminating in a 2017–2018 peak, when billions of dollars were raised by various projects, including notably shady ones. The appeal was simple: It was a way for anyone with an internet connection to invest in projects that seemed to grow in value rapidly. For instance, Dragon Coin (DRG), a payments system targeting the Southeast Asia online casino market, raised $320 million in one month, from February to March 2018.
ICOs require advisors to conduct extensive due diligence. Here are some of the most crucial elements in an ICO to evaluate:
Founder/company credentials and track record
Proposed product or service viability and competition
Token utility and use cases
Token valuation and sale structure
Planned uses for the proceeds
Advisors should not endorse ICOs unless they determine an offering is suitable after exhaustive due diligence. Even then, allocations should be minimal given the risks. A high level of caution is warranted.
While some ICOs are issued via their unique blockchain, most today launch on the Ethereum network and issue
standard tokens because of Ethereum’s maturity and smart contract capabilities.
Secure token offerings (STOs) are public offerings of security tokens sold in cryptocurrency exchanges. These tokens may be designed to comply with federal securities regulations, distinguishing them from ICOs. Aimed at more traditional investors, STOs are a more regulated, secure, and legally compliant way of raising funds and investing in blockch...
Aug 2, 2023 · An initial coin offering (ICO) is a way to raise capital for your project by selling blockchain-based digital assets. ... Write your white paper. A white paper is a pitch for your ICO. It will be ...
Jan 4, 2023 · In recent years, many initial coin offerings (ICOs) scams have been reported, attracting attention to this relatively new and unregulated ICO market, which lacks disclosure requirements and therefore suffers from intensifying problems of information asymmetry inherent in crowdfunding.
Sep 10, 2023 · In contrast, white papers that transit quickly between topics (i.e., speed) are less likely to have a positive impact. Keywords: Entrepreneurial Finance; Initial Coin Offerings, Cryptocurrencies, White Paper, Asymmetric Information, Signaling Theory, Natural Language Processing
Jan 14, 2023 · Abstract This study reviews initial coin offerings (ICOs) based on 80 empirical studies from 2018 to 2022. We apply a blend of bibliometric and content analysis to consolidate ICOs’ prior findings, track the evolutionary impact, and explore the semantic discourse and underlying theories in entrepreneurial finance. The content analysis concludes with five main streams that extensively explain ...
