Initial coin offerings, or ICOs, are a fundraising tool for startup technology companies, particularly in the blockchain and cryptocurrency space. In an ICO, companies sell virtual coins or tokens to purchasers in exchange for traditional currency or cryptocurrency, such as bitcoin. These proceeds finance product developments, such as a software application or digital ledger platform, to which the coins provide access once viable.
Once viewed as a form of crowdfunding, the coins provide a startup the means to raise cash while growing a community of enthusiasts and supporters of its future product. With the growth of bitcoin and cryptocurrency exchanges, coins have attracted a tremendous amount of speculation.
This speculation caught the attention of Canadian regulators, and in the summer of 2017, regulators issued guidance saying they believed many coins were securities subject to registration requirements. Many ICO issuers and purchasers saw the announcements as adverse developments, yet the regulatory bulletins did not change the fundamental pros and cons of ICOs:
- ICOs continue to offer the cash-raising and community-building aspects of crowdfunding
- Unregistered coins considered securities expose the issuer to civil fines, penalties, and other regulatory consequences
- Opportunities remain to use the developed product and benefit from the potential appreciation in the coin’s price
- The coin’s value may be volatile or decline
The bottom line is that some coins are securities and some are not, and issuers and purchasers are expected to know the distinctions and consequences. For small businesses offering coins to raise money, financial transparency rules continue to be important.