In 2017 ICOs around the world raised 6 Billion Dollars finally bringing in the limelight a concept and technology which had been lurking in the shadows ever since the early years of the decade. In the first 9 months of 2018, ICO had already surpassed the previous record by more than thrice, raising a total of more than 20 Billion Dollars. This is a testament to the unbelievable rise of this medium of financing new ventures and the consensus is that this is only the beginning.
New businesses and start-ups looking to finance their endeavours are opting to raise the required capital not by going to investors or issuing traditional shares and securities, but by issuing an Initial Coin Offering. In an ICO the people participating in the offering by buying the tokens issued are guaranteed some rights in return – in the form of tokens. These tokens can offer anything from the right to use the services of the company, to voting rights, shares or even a cryptocurrency. The most popular type of tokens to be issued are utility tokens which give the right to use the service being developed, to the user. Other types of tokens are value-based tokens, pre-sale tokens, and asset tokens.
Advantages of ICO
- The fastest way of raising capital as no intermediaries.
- More economical due to no fee for intermediaries.
- It helps to gauge user demand.
- It is easily available to the general public.
- Seamless process and no cumbersome procedure or paperwork.
- Greater liquidity.
- Accessible to investors from anywhere in the world.
Disadvantages of ICO
Like many other great technologies, there is a price to pay for the seamlessness and speed of ICOs.
- There is no intermediary so the investors, who are mostly common people with no technical knowledge, are vulnerable to fraud and scams.
- There have been numerous cases of incompetent companies or straight-out scams resulting in huge losses to the investors.
- The watchdog agencies of the world are growing increasingly impatient about the ICOs and the scope of vulnerability involved with them. Many regulations are soon expected all over the world.
- The United States is leading the world in answering the question of identifying and classifying tokens as securities or not. The agencies are targeting to broaden the definition so as to include as many tokens as possible in the category of securities.
- Rampant scams and failures have led to ICOs getting a bad reputation leading to organizations like Facebook and Google regulating and even blocking ICO related paid marketing content.
- The very structure of ICOs is susceptible to contradictions which often lead to crumbling of the company. For instance, two types of investors can hold a token – an early adopter of the service or a speculator. The objective of one would be to keep a stable price of the tokens so as to facilitate their use for accessing the service. The objective of the speculator would be to get the prices as high as possible for financial gain. Thus, the contradiction.
- Giving huge discounts to early adopters in ICOs, in turn, provides them a huge incentive to sell the tokens for a profit as soon as trade opens. This leads to a breakdown of the entire model of a start-up if not prepared for such a possibility from early on.
The Advent of STO: Security Token Offering
STOs have appeared as an answer to some, if not all, the fears and inhibitions related to ICOs. The primary differentiating factor for the STOs is the involvement of regulatory and overseeing authorities. This is a major step towards investor protection and increases the trust of the investors in a company’s intentions and its ability.
All the tokens are explicitly categorized as securities thereby mandating the involvement of overseeing agencies and offering regulatory processes to ensure no foul play. There is no scope for a non-security token in STOs. Due to this compliance by STOs, the government agencies and watchdogs often have a more favorable view of them.
The gain in safety against scams is balanced by the reduction in the speed of trading and liquidity when compared to ICOs. The processes of verification like the KYCs are much more formal in nature and thus the speed of trading takes a severe beating. This is also applicable when costs are considered. In ICOs as there are no intermediaries all value is shared between the company and the investor. However, in STOs since the trade takes places on intermediary platforms they take a chunk of the value too.
ICO Vs STO
There have been many arguments made that STO is the ICO 2.0 – an evolved form of the Initial Coin Offering. As the governments all over the world raise their heads and take notice of the perils of ICOs the road ahead is bound to get bumpy. Whereas STO is seeing its dawn in 2018. STOs have already been offered through versatile structures exclusively to accredited investors and in other cases to common public too. This is only a matter of which legal definition does one decide to put their STO under and how good is the company’s legal representation to justify it; as there is no set legislation on this almost anywhere in the world.
The success of STO in no way means the death of ICO which is still going strong in 2018. The most foreseeable outcome seems to be of a coexistence of the two by being used for the specific distinct advantages they offer over each other. The trends in the market show enough demand for immense growth in both ICOs and STOs. The users will be able to choose in the future among the two or maybe more options depending on their use case.
ICO & STO in Cyprus
There has been no specific legislation in Cyprus over either ICO or STO. However, they are governed under already existing securities laws and regulations. The most popular two ways to launch an ICO or STO in Cyprus is to either incorporate a company or establish a Cyprus investment fund.
The Cyprus Securities and Exchange Commission follows the guidance of the European Securities and Markets Authority. The ESMA released a statement in late 2017 stressing the importance of ICOs to adhere to regulations especially when their tokens or coins offered qualified under the definition of financial instruments. The specific regulations mentioned in the statement were –
- The Prospectus Directive
- The Markets in Financial Instruments Directive
- Alternative Investment Fund Managers Directive
- Fourth Anti-Money Laundering Directive
In Cyprus, the regulation applicable to an ICO depends most importantly on the type and structuring of the ICO and the rights ensured via the tokens. Thus, it becomes crucial to employ the services of a knowledgeable legal representative in order to avoid having to adhere to undesirable regulations.
Simon Zenios & Co – The Go-To Experts on STO & ICO
One of the most important things when planning an STO is to work on getting a reliable intermediary. We would help you in getting the best brokering services or Alternate Trading platforms to play the intermediary and ensure safety for the investors.
The quick-changing terrain of the crypto markets and technologies require the even the experts to constantly be on their toes. Our team of highly experienced personnel has stayed on top of all the changes and is the leader when it comes to expertise STOs in Cyprus. We are one of the first firms to acknowledge this new development and invest our resources to make sure our present and future clients are secure.
The process of running an STO/ICO also presents legal implications in regards to token design which cannot be overlooked. Depending on its design, your ICO’s token may be considered a financial instrument and could thus be subject to financial regulation. This is why it is vitally important to have legal advice and support throughout the process.
- Selection, Negotiation, Appointment of Intermediary for STO
- Assessment of Anti-money Laundering regulations being met.
- Legal Support during the Whitelist Period, Pre-STO (ICO) & STO/ICO period.
- SAFT Agreement.
- Token Purchase Agreement.
- Preparation and drafting of the ICO Private Placement Offering Document.
- Preparation and drafting of the pre-Crowd Token Offer (Pre STO/ICO) and Crowd Token Offer Agreement (STO/ICO).
- Legal Report for the Token (Security or Utility?) after the Reviewal of the Whitepaper (Opinion Letter from our Law Firm – Requirement for the Bank & the Exchanges).
- Legal Disclaimer for the Whitepaper.
- Security Policy.
- Legal Review of the Whitepaper.
- Legal Review of the Website.
- Legal Review of all Social Media Platforms.
- Legal assessment for the STO/ICO’s compliance with the current regulatory framework.
- Legal assessment of the application of the Token and STO/ICO within the current regulatory framework for investment services.
- Extensive legal review of the Token and STO/ICO’s compliance with other applicable legislation (Data Protection Regulations, Consumer Protection Regulations etc.).
- KYC Legal Advice and solutions for your ICO.
- Token Company Incorporation and maintenance.
- Marketing Company Incorporation and maintenance.
- E-money Company Formation & Licensing.
- Tax and VAT Services.
- Corporate Legal Services.
- Administrative and Fiduciary Services.
- Accounting services through our Associate Accounting Firm.
Other Non-Legal ICO Services
- Smart contract preparation and drafting.
- Creation of multi-signature wallet.
- Issuing of Tokens (ERC20 compatible).
- Listing on the Exchanges.
For any queries regarding any aspect of ICOs or blockchain companies in general, or any other legal matter under the sun, we are always available.