San Jose Business Lawyers Blog
Initial Coin Offerings (ICOs) have recently become a popular new source of funding for Silicon Valley businesses. They are new and exciting, but they can also be risky. It is important for business owners considering an ICO to understand both blockchain processes and the securities laws which apply to digital currencies. The experienced corporate attorneys at Structure Law Group can help your business enter this emerging market cautiously in order to explore the many exciting possibilities it holds.
An ICO is a method of funding a new (or even established) company by selling its own form of cryptocurrency. The company may accept traditional payments or even other forms of cryptocurrency. This financing is then used to fund the company’s operations. Its new cryptocurrency gains value, and this allows many of the initial investments to appreciate.
While the goals of an ICO are the same as those of an initial public offering, the process has some critical differences. IPOs are heavily regulated by the Securities and Exchange Commission. Investors are left with stock and voting rights which are clearly defined, and the entire process is underwritten by an investment bank. By contrast: an ICO has no underwriter, no equity or voting rights, and little regulation by the SEC. (The SEC is quickly adapting to this emerging market, and the regulatory landscape is likely to change drastically in the near future.) Interestingly, many ICOs involve new companies with little or no proven track record of financial success. Many do not even have products. All of these factors can make ICOs highly risky for investors.
The Dangers of ICOs
Because ICOs are so unregulated, consumers face a wide variety of risks to their initial investment. The New York Times notes that many cryptocurrencies are designed to work only with programs that the offering company intends to build. For example, Filecoin issued currency to be used as payment for data storage on a global cloud network that has not yet been created. BET is a coin designed to be used as chips in an online casino that BET plans to create. Neither the storage network nor the casino has actually been built. This means that investors may be left with a digital currency that is worthless in the event these plans do not come to fruition.
An unregulated market also paves the way for unscrupulous companies to take advantage of eager investors. Digital Trends reports that a fake startup company managed to steal more than $2 million in digital currency from investors in an ICO scam. Now the company is offline, and the cryptocurrency is gone. Developers, contractors, investors, and employees never met the company’s COO, who was only identified through a questionable LinkedIn profile. (Job experience listed on that profile has been proven false.)
So what does this mean for other companies who wish to raise funds through legitimate ICOs? First, it is important to be highly scrupulous, and upfront about all terms and conditions of the offering. Second, savvy consumers will be wary of scams in the digital currency market. Companies who wish to have a successful ICO must be thorough in their processes in order to offer consumers a product that provide some security in a highly unstable market.
Contact an Experienced Cryptocurrency Attorney in California Today
The knowledgeable corporate attorneys at Structure Law Group help business owners enter the cryptocurrency market with protection for their legal and financial interests. Schedule a consultation today by calling (408) 441-7500 today, or emailing slgadmin@structurelaw.com.