What the F is an Initial Coin Offering?

The blockchain technology continues to disrupt the world's financial sector in ways that regulators, economic enthusiasts, and investors are yet to comprehend. A new aspect of the blockchain technology is whereby blockchain startups are currently raising capital through what is known as initial coin offerings (ICO). It is, therefore, being debated whether the ICOs are the future of online investing or are they likely to be a source of regulatory crisis. The current era marks the birth of cryptofinance characterized by the emergence of cryptocurrency. ICOs are events in which cryptocurrency initiatives sells a portion of its cryptocurrency tokens to enthusiasts and early adopted in return for money today. ICOs, therefore, provides a leeway through cryptocurrency project innovators can raise capital for their operations. Mostly the ICOs raise money in the form of bitcoins as well as other cryptocurrencies. 

According to Robert Kim, A legal editor with Bloomberg, 2017 has witnessed a rise in the publicity for the ICOs. As the name suggests, ICOs are analogous to the ordinary initial public offers (IPOs) because the involve selling of digital currency directly to the public through blockchain technology. As a result, the ICOs bypass the regulatory systems, the capital markets, and their stipulations. ICOs are therefore similar to cryptocurrencies, which avoids the fiat currencies and conventional financial systems. The use of ICO is currently growing, and it is attracting much public attention. Beside their perceive benefits, ICOs carry high risks of fraud and frothiness and the possibility of increased regulatory focus. 

ICOs have various characteristics. First, unlike the conventional equity shares, they entail a scenario whereby an organization creates its digital currency referred to as altcoins. Advertising and releases of information on ICOs take place on the website of the issuing company and online forums such as Reddit and Bitcoin talk. Some of the ICOs are customarily announced on the cryptocurrency websites.  Secondly, during ICOs, investors buy the altcoins using bitcoins and other Cryptocurrencies. There are also secondary markets digital currency exchanges where the altcoins are traded for fiat currencies, bitcoins and other cryptocurrencies. The characteristics of ICO makes helpful to blockchain startups who are not able to find venture capitals. Moreover, the ICOs provide an opportunity for companies who are not able to meet the high costs associated with issuing IPOs. Additionally, ordinary IPOs are associated with disclosure requirements by the security regulators, this making it seemingly best alternative for raising funds for startups.

ICOs also have their downside. They are associated with regulatory uncertainty and limited disclosures. Currently, there is a pending issue whether the Security Exchange Commission (SEC) will accept altcoins issues during ICO as offerings of security. If SEC holds the altcoins as currency, they would then be subjected to the Securities Act of 1993 and their trade in the secondary markets would be guided by the Exchange Act of 1934. In a bid to evade the U.S security regulations, firms are registering their ICOs operations in foreign countries such as Singapore, which is one of the first nations to have regulatory relief for fintechs companies.

By skirting the general financial regulations, ICOs allow companies to the investors directly. As a result, it has become equally famous, as it has been controversial. Although critics say that venture is likely to be a mirage, ICOs has proven a more efficient ways of raising funds to finance socially beneficial startups. Through the altcoins system, ordinary individuals are helped to spend their money of social impact ventures. As a result, the enterprise is likely to promote a culture whereby entities are forced to perform better. Some of the ICO's involve token sales, meaning buyers of the altcoins get the right to engage in the companies' activities such as purchasing their services and products. Other altcoins give their buyers actual claim on the on the ownership of the company and future profits through the issue of digital stock certificates. Just like conventional securities, coins and tokens are traded in a secondary market where investors speculate the changes in their value over time.

The rate at which the ICO investments are growing has begun to evoke concerns and its comparison to the dotcom bubble in that its risks may have been overstated. The explosive growth in the use of altcoins shows some primary characteristics of a bubble. They involve forming a pool of assets and using the assets to pursue investments whose value is not easy to ascertain. ICOs are also likely to succumb to fraud. ICOs are subject to several flaws of human behavior that led to the institutionalization of the financial market regulations. The lack of transparency and full disclosure of reliable information is a pressing matter. Information on ICO offering re primarily published in unsupervised sites and this promoted an environment in which fraud can thrive. It is possible for investors to get false promises, which do not exist. Additionally, ICOs are threatened by the rise of cybersecurity. Further, the IPOs are threatened by the possibility of regulatory scrutiny. Addressing the various risks that the ICOs are subjected is a variable in determining whether the altcoins systems are a financial bubble, the future of online investments of a potential cause of a regulatory crisis. 

ICOs has managed to source funds in 2017 than the previous years, and this continues to raise concerns since Investors can easily be harmed by the venture if the necessary precautions are not taken. The SEC is considering classing some of the altcoins as securities to ensure regulatory oversight. In China, the financial regulators have deemed cryptocurrencies illegal. Such moves can prompt crackdowns, which might cause investors to dampen their interest in crypto financing thus resulting in the collapse of the industry.

Despite the risks, ICOs remains as a revolutionary way through which companies can raise the required capital to fund their operations. The world is currently digital and a global village. It is therefore essential to establish cross-border initiatives such as ICOs, where investors from around the globe can commit their funds to ventures. The ICOs has a high growth potential, and investors should think of how to utilize the opportunity. Nevertheless, it is essential for the several threats that face ICOs to be addressed to make it achieve its full potential in revolutionizing the world's economic and financial sector.