Many startups jumped onto the cryptocurrency bandwagon by offering Initial Coin Offerings (ICOs) in lieu of IPOs. But there were pitfalls here as there are with any new technology. ICOs can act like IPOs which are typically securities offered to investors.
If so, then the SEC governs the transaction. On the other hand, not all IPOs are securities. These are known as utility tokens and do not offer a share of the venture, but rather some other benefit, such as free services or the right to purchase a stake later.
Even with some confusion over the ICO itself, major investment banks are beginning to jump on the ICO bandwagon. In this article, a Silicon Valley cryptocurrency attorney discusses the pros and cons of ICOs to generate investment capital.
Analyzing the pros
When ICOs were new, companies reported making massive profits on security tokens. In one case, a company raised $600,000 in seed capital and saw their investment increase by a factor of 63,000. This is a huge selling point. ICOs remain a top commodity even as the value of cryptocurrency goes up and down. This is because cryptocurrency has to act like currency. ICOs are securities and do not need to operate like currency.
ICOs also give access to investment opportunities for investors who may not have millions to invest. This is advantageous to companies that want to cast a wider net. The value of these smaller investments can increase over time.
ICO tokens are online along with the whitepaper, team member background, and milestones. Milestones and plans are documented and investors have access to their investment’s progress.
All cryptocurrency tokens are easy to liquidate and ICOs are no different. Additionally, information on trading is updated in real-time, so investors can track financial indicators much more quickly. This also means that there is significantly less paperwork involved since all transactions are recorded on the distributed ledger technology the ICO is based on.
Analyzing the cons
As stated earlier, ICOs are not always securities like IPOs. If a company is confused on what they’re offering, the potential for investor lawsuits, fraud allegations, and financial loss is high. In some cases, ICOs turned out to be outright frauds. In other cases, it turned out the investors thought they were purchasing an equity token when they were actually purchasing a utility token. Security ICOs are regulated by the SEC.
Due in large part to the volatility of ICOs and startups in general, investors should treat ICOs like venture capital or angel investing. There is no guarantee of a return, no guarantee the company can meet the goals it outlines, and no guarantee you are dealing with a capable company.
Companies that offer ICOs must ensure that they know what they’re doing, especially if they are offering securities tokens that are governed by the SEC. A Silicon Valley cryptocurrency lawyer can ensure your company is meeting its legal obligations to investors and ensure the best interests of both your company and investors.
Talk to a Silicon Valley ICO Attorney Today
Structure Law Group, LLP can help your startup prepare to raise capital using an ICO. Call today at (408) 441-7500 or contact us online to discuss your interests in more detail and we can begin preparing your options immediately.