Business Essentials for Professionals


Even as Questions Abound with no Regulations, Digital Currency Sale Take Off

Even as Questions Abound with no Regulations, Digital Currency Sale Take Off
Bypassing banks or venture capital firms as intermediaries and are outside the reach of financial regulators are a small, but rapidly growing number of digital technology start-ups which are raising cash by creating and selling their own currencies in offerings.
On hopes that such "initial coin offerings" will match or exceed the performance of the first digital currency, bitcoin, investors are being drawn in.
There is enormous appeal of selling their own currencies, or tokens, to raise cash for the sellers. There is no paperwork as would be required for a public securities sale.
While some market experts and financial technology lawyers even question the legality of the tokens, the lack of regulatory oversight is raising red flags among them.
To meet the roughly $5.5 million fund-raising target for FirstBlood, the online gaming website Joe Zhou co-founded, he says he needed just 58 seconds to sell enough tokens for the purpose.
"We had expected the sale to run for a month and we even gave the people who participated early-bird discounts because we were not sure how it would go," Zhou said.
The currency required to play games on the platform, for instance, or claim rewards for referrals are the tokens sold by FirstBlood, like those sold by other companies.
With no intermediaries such as banks involved, and with encryption features protecting against hacks, for FirstBlood, a distinct advantage to having its own currency was to give gamers complete control over their funds.
By using blockchain, a ledger of transactions that first emerged as the software underpinning bitcoin and is maintained by a network of computers on the internet, the transactions are accounted for. Encouraged by the technology's ability to record and track the movement of assets, blockchain has gained traction on both Wall Street and Main Street.
Companies raising capital through the sale of tokens are all operating in the blockchain space.
The market has been growing at breakneck pace even though it is still tiny. Data from crypto-currency research firm Smith + Crown showed that compared with just $9.8 million in 2015, about $225 million has been raised so far this year in 40 initial coin offerings (ICOs).
Investors have no recourse or means to retrieve lost capital with such rapid growth comes wild swings in currency prices traded on digital asset exchanges such as Bittrex.
"What people are actually selling are just internet tokens that have no value, no legal meaning and represent no asset," said Preston Byrne, chief operating officer and general counsel at Monax Industries, a tech company that has developed a platform based on self-executing transactions called smart contracts.
Since the companies are selling tokens that can be considered securities, which fall under the Securities and Exchange Commission's jurisdiction, some market participants say ICOs could be illegal.
"Offering coins to retail investors as an investment, and then operating the scheme without registration, is probably against the law," Byrne said.
The coins being sold could be considered a security, if the issuer of the token intended to raise money from others for investment purposes, said Lewis Cohen, a partner at law firm Hogan Lovells in New York.
Until there is concern that substantial money has been lost by any investor it seems to be taking a hands-off approach, Cohen says even though he believes the SEC can investigate ICOs on its own.

Christopher J. Mitchell

Markets | Companies | M&A | Innovation | People | Management | Lifestyle | World | Misc