Buyer beware in coin offerings
Malcolm Burrows, principal of Dundas Lawyers
Everyone is talking about cryptocurrencies; first it was blockchain and now it’s initial coin offerings, or ICOs.
According to the Australian Securities and Investments Commission (ASIC), an ICO or an initial token offering is a new form of funding used by businesses to raise money through the internet. ICOs allow consumers to use cryptocurrency (such as bitcoin) to purchase coins for a set period.
The blockchain is an online distributed ledger that maintains a continuously growing list of transactions between multiple parties. An ICO utilises these new technologies to raise funds through the offering of secured tokens of cryptocurrencies. The tokens issued in an ICO are unique to the corporate issuer, thereby aligning the value of the coins in some manner to the perceived value of the company.
While the term ICO may sound similar to an IPO (initial public offering), don’t be fooled into thinking they are the same or even closely related. There are fundamental differences that consumers should be aware of, including:
Where an IPO usually entitles the subscriber to a small part of the company, an ICO entitles the purchaser to coin that is linked specifically to the corporate issuer and its place on the blockchain. A coin does not entitle the holder to any “ownership” rights in the company in a traditional sense, such as a right to receive a dividend.
IPOs are strictly regulated, whereas ICOs are usually based on the contractual terms by which they are issued.
Companies undertaking an IPO are likely to issue a prospectus, whereas companies undertaking an ICO usually issue a “white paper”.
In late September ASIC released Information Statement 225 to guide issuers of coins on the laws to which their ICO may be subject to in Australia. ASIC identified various areas where coin issuers may be subject to having to comply with the existing regulatory regime.
In another case of buyer beware, participants in ICOs should take care to read and understand the terms and conditions very carefully indeed.