A tiny, yet quickly developing number of digital technology start-ups is boosting cash by generating and trading their own currencies in offerings that omitting banks or venture capital companies as brokers and are outside the reach of financial regulators. Investors are being drawn in on hopes that such initial coin offerings will pair or surpass the performance Bitcoin. For the dealers, the appeal of trading their own currencies, or tokens, to raise cash is gigantic. There is no paperwork as would be required for a public securities trade, but the scarcity of regulatory control is lifting red flags among some market professionals and financial technology lawyers, some of whom even question the legality of the coins.
Joe Zhou says he needed “just 58 seconds to trade enough coins to meet approximately $5.5 million fund-raising target for FirstBlood“, the online gaming website he co-founded. The coins sold by FirstBlood, like those sold by other firms, are the currency required to play games on the platform, for instance, or claim rewards for criterion. For FirstBlood, a diverse leverage to having its own currency was to give gamers full authority over their funds, with no mediators such as banks involved, and with encryption features protecting against hacks.
The transactions are accounted for using blockchain, a ledger of transactions that first developed as the software underpinning bitcoin and is maintained by a network of computers on the internet. Blockchain has attained traction on both Wall Street and Main Street, encouraged by the technology’s ability to record and track the movement of assets. Firms raising capital through the sale of coins are all running in the blockchain space. With such speed development comes wild swings in currency costs traded on digital asset exchanges such as Bittrex, and investors have no recourse or means to retrieve lost capital. Some market members say ICOs could be illegal because the firms are trading coins that can be considered securities, which fall under the Securities and Exchange Commission’s zone.
First Blood’s Zhou does not want to call the company’s coin offering an ICO, but prefers to call it a pre-sale or crowd sale. Lewis Cohen, a partner at law firm Hogan Lovells in New York, said if the distributor of the coin destined to raise money from others for investment purposes, the coins being sold could be considered a security. Cohen believes the SEC can investigate ICOs on its own, but he said that until there is concern that substantial money has been lost by any investor it seems to be taking a hands-off approach. In determining whether a coin sale is legal, Peter Van Valkenburgh, director of research at crypto-currency advocacy group Coin Center in Washington, said it is important to determine whether the coin has a essential application, other than for investment. He cited shares in real estate co-ops in New York City which are bought by people who plan to live in the apartment that the shares represent. The sale of shares in co-ops is not regulated by the SEC.