When you need to raise money for your business, you can get going fast with an initial coin offering. This is like an IPO — an initial public offering of stock, but with cryptocurrency taking the place of shares being issued. Initial coin offerings and IPOs can both end in a large capital flow into your company. That’s where the differences end, though. An initial coin offering is fundamentally different way to obtain funding than an IPO. While your first expectation may be that anything goes in an initial coin offering, thanks to the crypto world’s history of self-regulation, in reality, Canadian regulatory agencies are now taking notice because of the potential securities implications of initial coin offerings.
How Does It Work?
Initial coin offerings trade relying on bringing in money from an angel investor or venture capital for a purely market-driven approach. Rather than shares of stock in a company, coins are issued to investors during the initial coin offering, which are then traded in the coin markets known as exchanges. The coin your company creates is not a physical piece of metal, but rather a digital cryptographic token. You’ve probably heard of some of the better-known examples of cryptocurrency, such as Bitcoin and Ethereum. The perceived value of what the company is trying to achieve drives the price of the coin.
Startups dominate the initial coin offering market, because they are typically the ones seeking immediate capital to kickstart a new business. Some experts suggest that if a company has access to traditional sources of funding that should be the priority, so consider investigating an initial coin offering as a secondary option.
Venture capitalists can see initial coin offerings as a negative signal, because accredited investors usually receive a seat on the board of directors or a stake in the company, and it makes them nervous if they don’t have a say in how you run the company. However, the market shows that this issue may be declining in importance as dozens of coin offerings spring up every day.
What Are the Risks?
Regulatory agencies as well as market pundits say that many initial coin offerings are unregistered securities. It is crucial you seek legal counsel with knowledge of securities and cryptocurrency to discuss your particular situation to be safe.
"In order to avoid costly regulatory surprises, we encourage businesses with proposed cryptocurrency offerings to contact their local securities regulatory authority to discuss possible approaches to complying with securities laws. We welcome digital innovation and we recognize that new fintech businesses may not fit neatly into the existing securities law framework," Canada Securities Administrators said in an August 2017 staff notice.
What Are the Next Steps?
At the very least, your business needs a white paper explaining the technical aspects of the token and the underlying blockchain technology that powers cryptocurrency. Compile the highlights of your executive team, establishing confidence that the members are competent to drive the initiative. Build a brilliant website to show it all off, as well as explain the intended product or service in consumer-friendly language. Hire a public relations firm to raise visibility well in advance of the offering. The agency you choose needs to have a track record of publicizing initial coin offerings that led to others reaching their funding goals, because generating enthusiastic participation is key to your success.
Initial coin offerings are an exciting new field of fundraising, and once the legal hurdles are behind you, your company could stand to see immense profits by running a well-ordered initiative. Unlike single-source funding like venture capital, the retail investors buying your tokens are also likely to be your first customers, just like a crowdfunding campaign. If your company needs to fund a new project, an initial coin offering is worth discussing at your next board meeting.