Initial coin offering

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An initial coin offering (ICO) is a method by which companies can raise money using cryptocurrency.[1][2]

Investors in an ICO are offered the chance to buy into a new company using cryptocurrency in exchange for digital tokens. These tokens offer investors access to a product or service offered by the company and can fluctuate in value. The offering of these tokens may differ depending on the specific ICO; some may qualify as a security, and are thus subject to regulation by the United States Securities and Exchange Commission (SEC).[3][4]

Typically, an ICO includes a new digital currency at a discount. If that cryptocurrency increases in value, the investor can make a profit. The tokens, however, do not necessarily grant the investor any stake or ownership in a company like a stock.[5]

An initial coin offering is similar to an initial public offering (IPO), but instead of stocks, investors get virtual coins.[6] Also, ICOs are not bound by the same rigorous rules that govern initial public offerings, as they typically do not denote ownership in a company. ICOs are more like a form of crowdfunding.[7]

In 2018 the SEC began issuing subpoenas and information requests in an investigation of the multibillion-dollar U.S. initial coin offering market, following a series of warning shots suggesting that many token sales might be violating securities laws. The SEC has also warned investors about scams involving ICOs.[8]

In July 2018, a study published by ICO advisory firm Satis Group concluded that approximately 78% of ICOs in 2017 were scams.[9]

In December 2018, the Wall Street Journal published its report on research conducted on 3,291 ICOs. The report said that 513, or 16% of the whitepapers studied contained evidence of plagiarism, identity theft, and promises of improbable returns. Many whitepapers had language that appeared to have been directly lifted from other published documents. Some included fake executive employee profiles on their websites, which used photos taken from people online without their knowledge or consent. Beyond this, over 2,000 of the reports examined included misleading or overly-promising language such as "guaranteed profit" or "no risk.”[10]


The SEC has declared that some, but not necessarily all, ICOs technically fall under the classification of "securities" under U.S. law, making them subject to regulation by the SEC.[11]

The United States Commodity Futures Trading Commission (CFTC) classifies cryptocurrencies such as bitcoin and Ether as commodities, making them subject to regulation under the appropriate CFTC guidelines. The CFTC's official primer on cryptocurrencies and ICOs specifies the CFTC's concurrence with the SEC's classification of cryptocurrency and ICOs, adding that in addition to being classifiable as commodities, an ICO may be regulatable by the CFTC as derivatives contracts, "depending on the particular facts and circumstances."[12]

Security Tokens vs. Utility Tokens

Typically, ICOs feature one of two types of tokens for investors: security tokens and utility tokens. Being able to tell which is difficult to discern on an individual basis, making regulation complicated. Security tokens are digital assets that pass the Howey Test, while utility tokens tend to be used similar to preorders, discounts on the company's goods or services, or other functions that are not directly related to the growth of the company.[13]

"The DAO Report"

In July 2017, the SEC released a statement that came to be known as "The DAO Report." The report was a breakdown of the recent attack on The DAO during its ICO, which resulted in hackers successfully stealing over a third of the DAO's tokens. The report highlighted the need for investor protection for ICOs, including but not limited to government regulation. It also specified that some ICOs may technically fall under the SEC's legal definitions for securities, making them subject to SEC regulations, as under such legal statutes, "the investment of 'money' need not take the form of cash."[14]


On November 17, 2018, the SEC announced that it had settled cases against two issuers of ICOs, Airfox and Paragon. The firms had raised $15 million and $12 million, respectively, to fund blockchain-based commercial projects. In these cases, for the first time in ICO matters, the SEC did not allege fraud.[15] It did require the defendants to pay significant fines, promise full restitution to investors and to register any securities that they issue.[16]


The first known ICO was held in July 2013 by a firm called Mastercoin, later renamed Omni, owned by J.R. Willett. Willett, a software engineer, published a white paper in January 2012 called "The Second Bitcoin Whitepaper" which outlined the concept. In it, he posited the idea that "new currency layers" and "new protocol layers" could raise funds for services. Ethereum, the cryptocurrency, held an ICO in 2014.[17]

The first ICO to launch registered with the SEC was The Praetorian Group. The company is billed as the first Cryptocurrency Real Estate Investment Vehicle (CREIV).[18] The coins of which (PAX) are based on the Ethereum or NEO blockchains, though the company's statement on their SEC registration form makes note that future technological advancements may lead to PAX becoming usable on other blockchains as well. The company also stated their intent to utilize PAX and smart contract technology to create transparency in funding real estate projects.[19]


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