ICOs stand for initial coin offerings, and they are ways to raise funds for various projects. People participating in such projects exchange their crypto tokens in exchange for cryptocurrencies such as bitcoin and ether. It works likewise to an initial public offering where investors part with their cash in a bid to get shares in a company.
ICOs recently came onto the market, and they have seen rapid growth in the number of interested people over time. In fact, members of the blockchain community often look into these mechanisms in a bid to find ways to make the most out of such opportunities.
There are different views regarding the usefulness of these money-raising techniques. On the one hand, some members argue that based on the lack of regulation in these securities, it is possible for the founders to come up with funds that are unjustifiable. On the other hand, many people are in support of the mechanisms, stating that it is a breath of fresh air in contradiction to the traditional methods that have been in use for decades on end.
These varying views called for the intervention of government agencies with the US SEC coming in with the Howey Test as a method of determining whether the token can go to the sale or not. This SEC test delves into the funding models in place, and where a crypto token is seen to be fit for the market, it becomes a financial security and is eligible for trading in the public domain. However, such a crypto token must get sold within the restrictions set by the agency.
It is pretty easy to set up an ICO funding model, and many technologies exist to aid in the same. As such, developers have an easy time in the creation of such assets by using such forums. Most of the funding models in place work by having interested parties send money in the form of ether or bitcoin to a smart contract. Here, the funds remain for a while before distributing tokens of an equivalent value after a given period. In a situation where the crypto token in question is not a security, almost anyone can participate in the trade as there are minimal, if any, restrictions. As such, the amount of money raised from such ventures is pretty high, considering that investors come from across the globe.
There are some complications with these techniques in that the money-raising takes place pre-product. As such, anyone putting in some money in the pool is undertaking a significant risk as the money-raising revolves around a lot of speculation. However, there are those who argue that this technique is especially useful because it positively impacts the development of the protocol.
The question as to whether these forms of money-raising are legal can get answered with a simple maybe. You see, these forms of funding exist in what we can call a gray area as the laws surrounding them are not very clear. Given that they are new and unregulated to a great extent, users are unsure of the legal implications of undertaking such investments.
Luckily, the involvement of the SEC in the recent times has enabled users to have some clarity on the issue. With this clarity, tokens now fall into different categories. On the one hand, a crypto token can get used for utility such that the holder of this asset can use it to access a network. In such a case, the crypto token is not classifiable as financial security and is thus not subject to regulation. On the other hand, a crypto token may offer equity to the user such that it can appreciate in value over time. In this case, it is more of financial security than it is for utility and is thus subject to regulation.
Users can look forward to more strides in the legality of such transactions to better shed light on the issue.