Cryptocurrency pre-ICO funding – a regulatory overview
Launching a cryptocurrency typically involves an initial fundraising process followed by a public sale process, by way of initial coin offering or token sale (“ICO”). In addition to providing the means to the issuer to pursue initial development, offset development costs and fund future projects, an ICO allows a large pool of interested parties to buy (and subsequently trade) the new cryptocurrency.
Creation of a diversified and sufficiently large pool of cryptocurrency holders is key to creating an interest and market for the newly launched cryptocurrency. However, in order to reach the ICO, pre-ICO fundraising may also be required. This is where proceeds of pre-ICO fundraising will be used to pay for the final development steps and for it to operate successfully on a cryptocurrency exchange. Pre-ICO fundraising should also help ascertain (and generate) interest prior to the ICO.
The UK Financial Conduct Authority (the “FCA”) does not regulate cryptocurrencies in their pure (coin) form3. On 12 September 2017, the FCA issued a warning to the public about investing in ICOs in which it stated that most ICOs will not be regulated by the FCA4. This article explains how cryptocurrency generally falls outside the remit of the FCA and considers what, if any, regulatory and legal oversight applies to pre-ICO fundraising.