newsbtc.com
Perhaps we are dealing with issuing of shares in most of the cases with underlying “business” logic! No matter how one names them, coin or token, reviewing the essence of the transaction over its form should give an answer. We may assume that investors expect at least basic protection of their rights, and those who seek investment clearly understand and in most cases are ready to facilitate this need. Countries, on their turn, are keen to establish investment friendly environments to promote and protect investments.
Nikhil has a working business or idea — needs funding to implement his goals. Where shall he go? Traditionally he would first check his bank accounts, then ask business partners/family to join , then look for angel investors, and finally a VC… He could also choose to take a loan from a bank or investment institution (could be a convertible), or issue notes for private or public placement, etc. This is more or less how it is done in a conventional setting.
Except for the case with a direct loan and/or notes (assuming his entity shares are not pledged), in all other cases Nikhil would offer shares in return. Assuming his entity is registered in a country with proper regulatory environment offering protection of investor rights, no matter how big or small an investment, owners of shares in his business entity shall have rights stipulated by the laws for proper reporting, transparency, auditing, and dividends at last. They also share the risk of anything going wrong with Nikhil’s business. Consequently, should shareholders find intentional “wrongdoing” by Nikhil in dealing with their investment, could apply to a court.
Nikhil has learnt about a new vehicle for attracting investment — an ICO. He writes a comprehensive White Paper, translating his business plan into more crypto-friendly propositions, detailing how the future sales and growth relate to the proposed coin economy. He then goes on to issuing 100,000,000 Nik tokens/coins each of 1 cent initial value, and conducts a successful marketing campaign. Following other ICO examples, Nikhil declares and keeps 20% of issued tokens for his team. By capturing the attention of the global crypto community, he starts happily collecting investments in crypto from all over the world, in large not knowing any of his thousands of investors. However he also notices participation of a few large investors, who do acquire significant stake in coins, in particular two of the investors taking 30% and 25% stake respectively. The rest of the coins are distributed among over 4500 investors. Once ICO is over, Nik becomes tradable on Coex exchange. Nikhil is happy and after building his business using the funds raised through successful ICO!
Australian Institute of Company Directors
To add more complexity to the matter, let’s assume Nik’s are sold for XYZ coin, and the price of XYZ difference from the start of ICO to the end in three months is +300%, given the hype in the crypto market: most of his investments Nikhil has received on the first day of the ICO. So, shall Nikhil decide to convert XYZ collected in USD terms Nikhil presumably has collected much more then he was anticipating. Instead of converting all of the proceeds, Nikhil unanimously decides to only convert small portion of XYZs received, enough to fulfill working capital needs, and rather keep the rest in crypto, hoping that the market will push the price even further up.
In a traditional regulatory environment, Nikhil’s business would require an open legal entity to assure protection of the rights of all investors, no matter how big or small they are. Also, Nikhil would most likely be a minority stakeholder, and would be required to invite the shareholders with majority shares in the company to decide about the significant matters of the business, in particular, they would normally have a right to appoint the CEO, CFO, a revision commission, auditor, and so on. Nikhil’s entity would be required to most likely follow accounting, tax and other regulations of its jurisdiction; conduct regular audits as well as publish the results through public media, making sure all the investors have access to the reporting.
As for the decision of Nikhil regarding the XYZ collected, most likely the activity of similar nature would require from Nikhil at least some kind of a license granting him right to operate with the money of other people…
In reality, most ICOs are outside of the traditional regulatory boundaries and stipulations, especially when conducted in territories that are less strict from regulation stand point (e.g. in cases when main business is conducted outside their jurisdiction, or are considering giving more freedom focusing rather on inflow of investment and job creation, etc.). This gives ample space for activity that in large follows the following principle, I believe — ‘if not prohibited by the law, it should be OK”.
So, let’s take a calm moment and give the above some thought: I do not claim I have all the answers, if any. Nevertheless, I would like to further contribute with few simple questions: are investors and investments in above scenarios different? What shall be the answer when trying to understand what is cryptocurrency and/or a utility token from the light of the ICO process? Shall ICOs be regulated?
Welcome to add your questions!
P.S. Here is a real life example of a message you may expect to receive almost every day, calling for your participation:
“Are you ready to participate in building a global industrial-scale cryptocurrency ….. of the future?
Follow these 5 steps to ensure you are ready to contribute:
- Go to the XYZ (name is hidden: GY) ICO portal www……… on February xx at 17:00. There is NO whitelist or KYC in advance.”
Bitcoin.com
And another quote from Bitcoin.com -“People are taking out mortgages to buy bitcoin, says securities regulator Joseph Borg. Coupled with accounts of credit cards and equity loans being used to obtain bitcoin, it raises the possibility of risk-taking investors being left deeply indebted or potentially even homeless.”
cover photo: vectorstock.com/20476903