What are the reporting requirements for a company undergoing ICO?
Do holders of ICO tokens have any say in the governance of an ICO company? Can they fire the founders if they are mismanaging the company?
What can they do to stop the founders from taking the money, and going to the Bahamas (Or spending it on their Uncle Tim's consulting business)? What recourse do you, as an owner of an ICO token have against that?
I've never had a serious answer to the last two points. The kind of transparency you tout is not the kind of transparency that securities markets currently lack.
So we have more transparency with these completely opaque ICO situations where the company name and country of operation isn't even clear? Versus the highly regulated filing requirements and GAAP independent audit requirements of a public company? Huh?
You seem to be positing an absolute: that an ICO can't behave transparently by nature. Which isn't true. ICO and transparency aren't mutually exclusive.
> The main problem with ICOs is that there are not many independent auditing organisations.
That is right but we are talking about a "thing" that is completely new. Future ICOs will have more due diligence, that is natural and it is unfeasible that they can continue with just a whitepaper in place. BTW, one sector in my company works specifically with ICOs and we are working with some real companies, doing and selling real products, and they plan to launch their ICOs in the next 6 months.
>"The bit that wasn't initially obvious to me is that these are all literally just investment rounds. They're just raising money and the "coin" is in many ways similar to a share."
This is kind of where my understanding of ICOs falls short. My understanding was that ICO coins don't entitle one to any equity in the company just the coin:
"ICOs are the Wild West of financing — they sit in a grey zone where the U.S. Securities and Exchange Commission (SEC) and many other regulatory bodies are still investigating them. The main problem is, though, that most ICO’s don’t actually offer equity in start-up ventures; instead, they only offer discounts on cryptocurrencies before they hit the exchanges."[1]
If that's the case it's not like a share at all. Wouldn't it be more like a credit default swap or other derivative?
Sure, but Ethereum is a tool. An ICO is the result of a process.
My thesis is that many companies, large and small, could benefit from an ICO...and that the majority of these know little about ICOs, Ethereum, or the relevant government regulations.
The newco would present the following offer to the prospective customer: --We will ready you for a legal ICO within xx weeks. To do this, we will help you define the unit-of-value for your token and then put all systems, paperwork, and processes in place for the ICO. In return, we will receive coins worth nn% of the ICO as a success fee.--
This is a novel variation of an investment-banker play. Over time, large parts of the process could be systematized in software. Much of the ICO scene is scary and wild. [0] Pathfinders might be valued in this wilderness.
> If you're offering an ICO yourself, things are going to get an order or two of magnitude more complicated, I'd imagine. No idea how it's classified but I'd imagine your regulatory reporting burdens will be somewhere between pink sheets and a publicly traded NYSE post-Sarbox company.
They are actually simpler, I know this from running an OTC for a few years. The blockchain keeps people far more honest and transparent than Stock Transfer Agents, IQCapital and DTCC combined.
T
> Do we really know what a "typical ICO" is at this stage?
Yes, we can look at the ICOs that have happened and draw conclusions.
> And as fast as the sector is changing, how do we know what will be typical by the time new legislation is
(a) passed
This isn't about new legislation. The Howey Test dates from 1946. The fundamental characteristics of ICOs are not new (and have nothing to do with blockchains).
> Many (typical?) ICOs are not companies
I have no idea why you think this changes anything. It doesn't.
> Which explicitly state that it is not an investment
As I already mentioned, fine print doesn't fix the problems being discussed here.
>If you're doing a legal ICO it has almost no benefit over traditional fundraising,
The way I read that is there are benefits. Seems to me it’s significantly more cost effective than a private offering and order of magnitude more cost effective than a traditional IPO.
>and some huge regularity drawbacks (not knowing who owns the shares).
Not knowing who owns the shares is in fact illegal.
Until one or more ICOs bring successful and innovative products. At the fundamental level ICOs are a frictionless way to fund your project. There will be a lot of scams and unproductive projects until the community makes an error correction looking for more due diligence and stronger evidence. There is a huge gap between ICOs and IPOs that make it difficult to fund new companies globally.
> Who invests:
- Some of the hundreds of thousands of people who have made big $ in crypto - especially ether
> How do ICOs reach these people:
- There are numerous forums/chatrooms/reddits/twitter posters etc etc. One of the common tricks is for ICOs to reward 2-3% of tokens in "bounty programs" which basically rewards participants for facebook/forum/blog/youtube posts/spam. Very large ICOs like bancor have done this
> Legal status of ICO's
- Unclear, but they are global and switzerland - where many of them are based out of seem to have liberal laws. For the SEC they seem to have indicated that you are likely to get in trouble if ICO's are more equity based, whereas "token" based network payment stuff is less clear.
The high early liquidity of ICO's basically mean that if an ICO has capped investment and has any sort of credibility, the ICO will reach its cap rapidly and when it opens on the exchanges it'll be up 3-10x and you can dump it and make a fortune, regardless of whether it is actually vaporware or a ponzi. This does not really happen in the past 3 months as the high demand ICO's generally take as much money as possible and don't cap it.
I think its sad that this business is going the way of the venture capital biz where well connected people get early/cheap dibs and average joes only get in once all the potential gains have been sucked out. Compare this to the ethereum ICO where everyone really got a fair short. I also think that if these have ponzi elements, being a preferred/connected/private investor in a ponzi makes you complicit in the ponzi scheme, whereas being an average joe just means you're playing the game.
>3. Another easy solution is to have these ICOs hold the proceeds in escrow and release of funds quarterly for five years to the startups/projects and giving the investors the ability to refund half or 75% of their remaining commitment (i.e. a 25-50% penalty for leaving the project early).
I've seen something similar to this in another ICO. They set up an ethereum smart contract that would distribute 90% of funds raised to the project over 4 years. If an investor wanted out, they could send their tokens to the contract and (iirc) it would burn them and refund the investor with ETH at a 10% haircut to the original buy price. Alas can't quite remember the ICO or the exact details (it was in a random whitepaper I read).
What are the reporting requirements for a company undergoing ICO?
Do holders of ICO tokens have any say in the governance of an ICO company? Can they fire the founders if they are mismanaging the company?
What can they do to stop the founders from taking the money, and going to the Bahamas (Or spending it on their Uncle Tim's consulting business)? What recourse do you, as an owner of an ICO token have against that?
I've never had a serious answer to the last two points. The kind of transparency you tout is not the kind of transparency that securities markets currently lack.
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