If you are currently the owner of a crypto company, or plan to establish one in the near future, then launching an ICO can be an interesting way for you to raise funds for your business. It can also allow you to create a new coin, service or app. An ICO is essentially a profitable way to raise money, for services and products that are somehow related to cryptocurrency. An ICO is somewhat derived from an IPO, with the difference that an ICO is mostly aimed at software services and products. In some cases, ICOs have been massively successful with a high amount of returns for all investors. In other cases, ICOs failed or turned out to be fraudulent. This means, that we do strongly discourage people with no knowledge of cryptocurrency at all, to launch an ICO. You will be better off investing in some already established coins instead. To launch an ICO, you need at the very least a basic understanding of cryptocurrency, exchanges and wallets. Due to the fact that ICOs are mostly unregulated, investors should be cautious and diligent when investing in any ICO.
What is an ICO exactly?
ICO is an abbreviation of Initial Coin Offering. When someone starts a new crypto project, they launch its own coin (token), which is then sold to early investors. This model is very similar to the first round issue of shares of a regular company, which is named Initial Public Offering (IPO). One major difference is that the issue is accessible to the general public, on the contrary to solely being reserved for venture capital. Most ICOs are taking place on Ethereum (ETH). The offered tokens can also sometimes be purchased in a regular currency such as euros or dollars, but in general investors pay with already established cryptos. When you can find a handful of investors who believe in the new project, they will pay you in ETH, and get the new tokens in return. The investors can use the coins in the new app, or simply sell them at a profit at a later stage. ICOs are internationally purchasable, since anyone with internet access and a digital wallet can buy the tokens.
So in general, ICOs are a profitable way for (new) companies to finance the development of their products or services. Via the use of blockchain technology, the provider issues new digital tokens during an ICO. All crypto tokens differ greatly in design and function, and you are fairly free in the development stage. Often tokens constitute a right to the service to be developed, or a (future) reward, and sometimes no value whatsoever. It is also possible that you entitle investors to a share in a project, or a predetermined part of the expected returns. ICOs are structured in a way that they often fall outside the scope of financial supervision, as we already explained above. As a result, the general protection that Dutch financial supervisory legislation offers to investors is absent. With a few exceptions, the AFM cannot therefore supervise ICOs.
More about blockchain technology
If you are fairly new to crypto, it’s advisable that you inform yourself about the technology that backs it: blockchain technology. Blockchain technology is based on the principle of a decentralized system and openness. A blockchain essentially consists of a network of computers, but these computers are not the exclusive property of solely one participant. Via algorithms, all participants in the network are able to decide which information is valid and which is not. This involves factors such as transactions that are carried out on the network. Then, this information is stored in ‘blocks’, that together form a chain. Hence, the term blockchain. This means, that all participants in the network have access to the same information in the blockchain, simultaneously and at any time. This is made possible in the form of a shared ledger, that any participant can access.
One of the main benefits of blockchain technology is, that it’s completely impossible for any participating individual to manipulate information. Due to the fact that everyone has access to the same information, the information doesn’t become tainted with redundant or fraudulent data. There are many possible variants of a blockchain. At this moment, bitcoin is the most famous application. Many blockchains have an open character, so this means almost anyone can participate. If you have access to the internet, then you can use such a blockchain, for example, to carry out transactions. All participants in the network then verify these transactions, and record the valid transactions in the blockchain. Information about all actions is stored securely and truthfully.
What is the difference between cryptocurrency and an ICO?
People often ask what the difference between an ICO and crypto is. Currently, there is not really a very clear distinction between tokens in an ICO and regular cryptos, since these terms are mostly used interchangeably. Nonetheless, they are definitely not completely the same. Once important difference is the fact, that anyone can create and spend tokens, if they have a bit of programming knowledge. In crypto, though, this is carried out by an algorithm that has a predetermined set of rules. The regulation of the creation of units, which is called mining, is possible due to certain cryptographic techniques. These also play a part when transactions on the decentralized blockchain network need to be verified.
This means, that the issuance of the units involved is determined in advance. This relates to, for example, how many and in which way the tokens will be issued. If you take Bitcoin as an example, you see that miners receive tokens as a form of reward for finding blocks in the chain. Then, the transactions are recorded as Bitcoins in these blocks. After that, the block will be added to the already existing blockchain. This actually requires a very high amount of computer power. On the other hand, digital tokens can be seen as units that can be created on an already existing blockchain. If you are the designer of such a token, you basically can decide a lot of details for yourself. This entails the amount of tokens you would like to create, how to issue these, and other functionalities you want to assign to the token. The Ethereum blockchain is actually specifically designed for this purpose.
ICOs create new and exciting opportunities
One of the main benefits of an ICO is the fact, that it makes it very easy to raise a substantial amount of funds very quickly – if it succeeds, of course. This enables you to start up new crypto projects, plus you are obviously also rewarded for your work in the process. A reason that tokens are so popular, is due to partial ownership. This also plays a role in the issuance of shares, since owning a token or share might bring in money at some point. As long as you still own the token, there is a possibility of making a large profit. Therefore, it is fairly easy to encourage people to join your network. Furthermore, ICOs open up many possibilities for investors who don’t have that much to invest. Not everyone is a millionaire: most people have to live with regular wages. But even with a regular salary, you can easily invest in tokens. It sounds like a dream, which it can be, but it is very important that you also inform yourself about all the risks involved with starting an ICO. We will outline these below.
Are there any risks involved with launching or investing in ICOs?
If you consider launching or investing in an ICO, you should be acquainted with the various troublesome scenarios that currently flood the market. For example, there are many cases known in which people bought tokens with money they actually needed, and thus, this got them into trouble. The same applies to people who borrow money to buy tokens, in some cases these amounts are staggeringly high. Why do people do this? Because they feel they might miss a great opportunity, since they believe that the price of the token will yield as much profit as Bitcoin did. This anticipation of extremely high profits can blind people to the risks associated with an ICO, whether you are the one launching it or investing. You genuinely risk losing your entire investment. Please keep in mind that the crypto market is still speculative in nature. Therefore, you should never invest money that you cannot miss at the moment, or might need for later. There are other factors that might negatively impact your investment, which are explained in detail below.
Be sure your knowledge about the market and topic is sufficient
One of the main ingredients of a successful investment, is prior knowledge about its specifics. If you don’t know what you are investing in, you are basically giving others the power to scam you. Especially in a volatile and fast-paced market such as crypto, it is essential to educate yourself about the coin you want to invest in. In the past, due to this reason, the possibility of investing in a start-up was generally reserved for professionals with plenty of knowledge and expertise. Nowadays, it is possible to privately invest due to blockchain technology. Anyone with a bit of money, an internet connection and a wallet can invest in tokens. A lot of private investors get carried away with exaggerated promises of almost impossibly high returns on investment, and thus, underestimate their own experience and knowledge. Without this expertise and in-depth knowledge, actually meaningful revenue models are almost not distinguishable from projects with no added value. Make sure you know what you are doing and spend time reading information, before you spend money.
Do not overestimate possible returns beforehand
Crypto has mesmerized millions of people, especially after Bitcoin skyrocketed during recent years. This has led many investors to believe, that their investment will also yield enormous returns. Please be cautious, though, since crypto is still in its infancy. The promise of fancy new revenue models always attracts plenty of investors, but only experienced investors should actually put money into something so new and volatile. If you want to invest, it would be wise to seek assistance from someone who knows the ropes. New technology always creates new revenue models, but can also lead to expectations that are overoptimistic. There is a big chance, that your personal expectations will not be met. Especially ICOs are in very early stages of development, and thus, it is highly unclear if any plans or expectations can be fulfilled in reality. Blockchain technology in itself is very new and still in development. Errors in the code can pose a threat, as well as theft of your tokens. Even a great idea can tumble sometimes, so make sure you can miss the money if you decide to go for it. Because there is also a chance, that the value of the token will be much lower than your initial investment.
A general lack of transparency
Another issue with ICO’s is the fact, that certain providers aren’t always transparent regarding the information they provide to potential investors. Often, basic information is hard to find, and important parts are even left out completely. This can include information such as the rights that the holders of the tokens are granted, the risks involved with a specific project, and the way the financing of the project is spent. If you don’t have all the essential information, it’s almost impossible to be able to value an ICO correctly. Furthermore, it is also very difficult to distinguish good projects from fraudulent ones. Next to that, a lack of transparency can also lead to inefficient pricing of tokens. Always try to provide as much information you are able to, when you launch an ICO. If you are an investor, make sure you have all information you need. If this information is not provided, you should try to contact the provider and ask for extra information before you invest.
ICOs attract scammers
One of the largest problems with ICOs is the fact that it attracts scammers internationally. Blockchain technology allows for cross-border investments, which means that everyone can participate worldwide. But there is also the topic of anonymity surrounding crypto. Even though it’s generally a positive feature of crypto, it inevitably also attracts criminals and fraudsters. Due to it’s worldwide reach, some have taken advantage of this fact in a very negative way, by creating very advanced pyramid schemes. These are sometimes hard to recognize for people who don’t know much about ICOs and crypto, so there are a lot of very easy targets for fraudsters to hit. The hype surrounding crypto makes it easier for them to make investors believe, that they might miss a fantastic opportunity by not investing. There are also fraudulent ICOs, aimed at misleading investors to get rich themselves. The intentions of providers are generally good, but keep in mind that some others might outright scam you too. Some of these scams are known as exit-scams, where the provider and developers suddenly disappear after they have sold their own coins. Be mindful and watchful when you invest.
Massive price fluctuations
Last but not least: keep in mind that all tokens are subject to enormous price fluctuations. Most people who invest in ICOs generally step in with a speculative purpose. They essentially invest, because they expect they will be able to sell their tokens quickly for a higher price. This speculative nature surrounding ICOs leads to extremely volatile prices of traded tokens, on various platforms. Since these platforms do not fall under the scope of financial supervision, this is something that cannot be regulated. Sometimes a token can fluctuate up to 100% per day. This can be exhilarating when the price goes up, but at the same time disastrous when it goes down. On top of that, the trading of a lot of tokens is limited. This makes it possible for fraudsters to manipulate the process, if it suits them.
Is it wise to even consider launching an ICO with so many risks involved?
The list of possibly negative scenarios within this business is quite severe. It might put a lot of people interested in ICOs off, which is not exactly a bad thing. As we already stated above, it is of the utmost importance that you inform yourself about the entire market. If you don’t, you can easily fall into the hands of experienced scammers. We generally advise investors and start-ups to read information and acquire substantial knowledge, before taking action. You can also seek aid from more experienced parties, such as companies and individuals specialized within the market. Intercompany Solutions can definitely assist you, in order to make sure that you don’t make any mistakes. This can have very serious consequences, ranging from losing all your money to going to jail.
When does an ICO fall under the Dutch Financial Supervision Act (Wft)?
As previously discussed, a large portion of the worldwide crypto market falls outside the scope of financial supervision institutions such as the Dutch Wft. Most tokens can be structured, for instance, in the form of a (prepaid) entitlement to a future service of the issuer. In all these cases, they fall outside the scope of the Wft. One exception to this, is if the token, for instance, represents a share in the project or if the token gives entitlement to part of the (future) returns from the project. In these circumstances, the token may qualify as a security or a unit in a collective investment scheme, as defined in the Wft. The Dutch Authority on Financial Markets (AFM) assesses each case separately to determine whether the Wft applies, and will also closely supervise whether the Wft might apply. Potential issuers need to properly analyze the extent of any overlap with financial regulation and supervision, before launching their ICO. It would be prudent to investigate properly what the definitions are, that the AFM uses to determine the security status. It is a possibility to approach the AFM with a clear prospectus (offering), and get a ruling in advance. This way you limit risks on your end.
The qualification of a security (effect)
In each separate case, it has to be determined whether a token qualifies as a security as defined in Section 1:1 Wft. This is done on the basis of the token’s legal and other features. In line with the definition in this section, it is important to establish the extent to which the token qualifies as a negotiable instrument that is equivalent to a negotiable share or other negotiable instrument or an instrument equivalent to a right. A token may also qualify as a security, if it represents a negotiable bond or other negotiable debt instrument. A token additionally qualifies as a security, if a share or bond can be acquired through the exercise of the rights attached to a token or through conversion of these rights. Lastly, a token meets the definition of a security if it is a negotiable security that can be settled in cash, where the amount to be settled depends on an index or other measure.
For a token to qualify as a security equivalent to a share, one important consideration is whether the token holders participate in the company’s capital and receive any form of payment for this. This payment must correspond to the return achieved with the invested capital. Any controlling rights are not decisive in this respect. The AFM moreover uses a wide and economic approach for the term negotiability. Further information on this is available in the Negotiability Policy Rule of the AFM. If the tokens qualify as a security, a prospectus approved by the AFM is compulsory – to the extent that no exception or exemption applies. Further information is available on the AFM website. In any case, investment firms facilitating trading in such securities must observe the requirements with respect to the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
Qualification of a unit of participation in a collective investment scheme
An ICO is subject to financial supervision, if it concerns the management and offering of units in a collective investment scheme. This is the case, if an issuer of an ICO raises capital from investors in order to invest this capital in accordance with a certain investment policy in the interests of those investors. The funds raised have to be used for the purpose of collective investment, so that the participants will share in the proceeds of the investment. An increase in net asset value also qualifies as the proceeds of an investment. In this connection, amongst other things, the AFM applies the guidelines published by ESMA on key concepts of the Alternative Investment Fund Managers Directive. Under Section 2:65 Wft, a license from the AFM is required for the offering of units in a collective investment scheme, unless the issuer is eligible for the registration regime. Further information is available on the AFM website.
Trading of tokens falling under the Wft
So what happens to certain platforms, when tokens are traded that fall under the Wft? We discussed before, that most platforms don’t fall under any financial supervision. Nonetheless, when platforms facilitate the trading of tokens that fall under the Wft, these specific platforms will also require a license from the AFM. This is necessary for the provision of investment services, pursuant to Section 2:96 Wft. If you want further information about this topic, then you can find it on the AFM website. Potential issuers considering an ICO, and wishing to issue it subject to financial supervision, may contact the AFM for any questions. The Intercompany Solutions team can also help you with any questions you might have regarding this topic.
What to think about when you want to launch your own ICO?
If you have read all the information and still want to launch an ICO, then we can definitely assist you with your plans. It is smart to research other providers. This is undoubtedly a requirement for the coin offering. If you really want to start, it’s essential to make a list of everything you need to do beforehand. Especially for ICOs you will have to look into various aspects. The following questions can help you sort out the most important information:
- To whom are you planning to offer this investment?
- Where are these persons based?
- Are these qualified investors or average people with limited knowledge about the topic?
- How will they invest: through ETH or with fiat payments?
- What are you exactly offering, are these shares, revenue share, credits, coupons etc.?
- Can your token be seen as a utility token, community token, or is it more like a currency?
- What are the benefits for the investors of your ICO?
- What is the legal qualification of your token, according to the Dutch regulatory definitions?
- Do you already have a prospectus or a brochure for the token offering?
- Is your brochure and prospectus compliant with the Dutch investment offering regulations as determined by the AFM?
- What is the plan and the method of your ICO?
- The investors would be using normal fiat payment methods such as credit card through Stripe. Will they be able to invest using ETH or BTC as well?
Once you have accumulated all this information, it will be much more clear to you, as well as your investors, what it is you are trying to accomplish. When you are ready, you can contact our team to help you further with your ICO.
Intercompany Solutions has assisted in the establishment of hundreds of different companies in the Netherlands, ranging from small businesses to large multinationals. Currently, Intercompany Solutions is also assisting several other crypto firms. One of our clients is starting an initial game offering, whom we are assisting with all the legal paperwork and regulations. The initial game offering is quite similar to an ICO as an idea, however the products that are sold vary from tokens. We have also extensively researched the legal and tax status of cryptocurrency in the Netherlands, so we have quite some information readily available. If you want to launch an ICO, please make sure you can provide us with all the information we need, for a smooth process. When we receive the relevant information, we can discuss your case with our Authority of Financial Markets specialized lawyer. We can always schedule a phone call and give you a quick estimation of the scope of the requirements, the best course of actions and timeline. Feel free to contact us anytime.