Initial Coin Offerings – the digital financing process under global scrutiny

08 December 2017. Published by Rachel Ford, Partner

In an era of social media platforms and the like, the technological world creeps into its corporate counterpart of today. Initial Coin Offerings (ICOs) storm the corporate world by force, but what does the future hold for the new phenomenon?

Way back when, a company could raise finance by issuing shares in return for a sum of money. In today's era of technology and digitalisation, the traditional equity finance process may now be the inferior choice. Now, we see an alternative - the introduction of ICOs.


So what is an ICO? It involves a company issuing digital "tokens" or "coins" in exchange for either cryptocurrencies, such as bitcoin or ether, or normal currency.  The digital "token" or "coin" will often have certain rights or attributes attached to it and can be sold on to other investors (just like a share in a company). 


In 2017, over $2 billion in funding was raised via ICOs alone. In quarter 2 of this year, for the first time the total funds raised by ICOs exceeded those raised via traditional equity financing. The digital financing era has taken storm throughout the corporate world, and it isn't finished yet. Not just that, but the values of cryptocurrencies are soaring. The bitcoin, for example, has seen its value reach over $15,000 – an increase from around $1,000 at the start of this year.


Regulators globally have issued warnings to investors about the use of ICOs. After warnings were published by the US, Singaporean and Canadian financial regulators and a complete ban on ICOs was issued by the Chinese government this year, the FCA spoke out in September warning consumers about the risks involved with the digital financing process.


When considering whether an ICO will fall outside of the FCA's regulatory remit, the FCA has said that it will be decided case by case but that "depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities". From that, it seems the FCA won't be letting the issuers of ICOs get away without a fight.


In recent news, the European watchdog has become the latest to issue a warning about ICOs, describing them as "very risky and highly speculative". It went even further to issue guidance for companies using ICOs and has said that in instances where an ICO qualified as a financial instrument, businesses must comply with EU regulations, including MiFID II.


The use of ICOs continues to grow, and financial regulators across the globe continue to look carefully at them. The high risk and speculative nature of these digital financing models will no doubt hit the headlines again and we will continue to look out for how the regulators propose to deal with them.

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