The year 2018 was a total disaster for the crypto world. In a space where the focus seems to be price and price alone, the general feeling was that of FUD (fear, uncertainty, and doubt).
The effect of this global downtrend was never more apparent than for ICOs. Initial Coin Offerings started 2018 with a bang, by 2nd quarter of 2018 alone, they managed to snag 10 times more than the cumulative sum of investments from ICOs of Q1–2 2017. However, in the span of a year, the ICO investments per month — went from more than $1 Billion in January being invested, to just $179 Million in November.
On top of this, the US SEC’s recent outings against ICOs, has rocked the world of cryptocurrencies and promoting more FUD. The agency has tagged each ICO offering as securities, making anyone who wants to raise funding through ICOs to be compliant with federal securities law. For a company issuing a security, the offering must be registered with the SEC or qualify for an exemption — which includes selling to accredited investors, investors outside the U.S. or to certified investors with an annual income above $200,000.
The crackdown is not only happening in the United States, but the regulatory landscape for ICOs is also shifting and advancing in most countries. Regulators are taking real steps to crack down on scams, making new standards, and introducing new regulations.
This November 2018, Airfox and Paragon Coin Inc., two ICOs which made their token sales campaign last year, both were charged by the U.S. securities regulator who contended that neither startup registered their ICOs as securities offerings. Neither also qualified for registration exemptions. In addition to registering their tokens as securities, both companies will have to refund investors, file periodic reports to the SEC and pay $250,000 apiece in penalties.
As such, ICO’s are scrambling to comply with their government’s rules to avoid scrutiny and legal battles. Some have been able to get off the SEC’s hook by quietly refunding investors money and paying a fine. Basis, one of the most well-known stablecoin projects, is said to be shutting down and returning the majority of capital raised to investors.
Some, like Coinvest, a technology company that develops solutions to empower the world to execute financial services using blockchain technology has tried, from the very beginning, to start on the right foot. While Coinvest is currently a startup, it aspires to become a corporate leader in both the FinTech and blockchain industries. With that, it has tried to comply with all rules and regulations that apply to its business entity and the overall industry. Although Coinvest has passed the Securities Law Framework for Blockchain Tokens, it has strategically decided to proactively file a regulation D with the SEC to list the COIN token as a Security. Unlike many other companies in the blockchain space, Coinvest has been working to ensure that their business is compliant with all local and foreign jurisdictions and laws which might deem various activities illegal if compliant steps aren’t taken.
Among others, its partnership with Republic Crypto is a calculated step in order to achieve compliance. Republic Crypto is a token pre-sale platform where startups can fundraise and finance their coin offerings from pre-sale to launch while complying with all SEC requirements. The company is itself a division of Republic — a fully licensed funding portal that is part of the AngelList, Product Hunt, and CoinList family of sites. Republic is led by Kendrick Nguyen — AngelList’s former general counsel and a securities litigator. According to Nguyen, “We’re here to solve all of your fundraising and token distribution needs. And also help you not go to jail.” Although a tongue in cheek quote, the company seems serious enough as it staffs five in-house attorneys, three of which are devoted full-time to the crypto division, and retains an external legal counsel.
For the year 2019, more and more crypto would be focusing on compliance. The key word here, for now, seems to be “proactive’. While there are still a lot of gray areas with the law, proactively registering makes sure that it not only gets them out of legal trouble but also protects stakeholders and investors. It would also go a long way for sifting through the rubble for better ICOs.
This December, the US SEC Chairman Jay Clayton said that he believes “ICOs can be effective ways for entrepreneurs and others to raise capital,” which means that blockchain startups don’t need to abandon coin offerings as a fundraising mechanism altogether.
Because for better or for worse, ICO’s have proven to be an effective method for startups to raise funds as an alternative to traditional fundraising including Venture Capitalists.