Q: I read about a company doing an initial coin offering. Can you explain what’s going on there?
A: Earlier this month the blockchain technology company Digital X, which is listed on the Australian Securities Exchange, announced that it had been engaged as an adviser to a blockchain energy trading company Power Ledger for its initial coin offering.
Power Ledger has already had a pre-ICO “token generation event”, in which it raised the equivalent of $17 million in digital currency. Now it is offering 140 million tokens. The company’s POWR tokens will be auctioned via the Ethereum cryptocurrency network.
Solar Power uses blockchain technology to allow households to trade excess solar power over the electricity network.
Confused? In a note to clients, Marque Lawyers says an ICO is somewhere between an initial public offering and crowdfunding.
Like IPOs, ICOs are a form of fundraising but instead of issuing shares, companies issue coins or tokens.
And like crowdfunding, the coins or tokens are usually used to fund a specific project and giving rights to products or services. Holders may also have rights to returns generated by the project.
The coins or tokens are distributed through distributed ledgers (such as Ethereum). Holders may have access to a secondary market where they can trade their coins or tokens.
UK law firm Latham & Watkins estimates that there have been about 100 ICOs worldwide, which have generated about US$1.2 billion of funding. Other estimates put the money raised at around US$2 billion.
As companies turn to ICOs for fund raising, regulators are getting involved. Last month, the Australian Securities and Investments Commission issued guidance for issuers.
ASIC’s view has been that cryptocurrencies are commodities and not securities but in its guidance it says it may regulate ICO issuers when they take on the features of regulated entities, such as managed investment schemes or derivative products.
If ASIC deems that the coins are being used for general funding of the business, in the same that share capital is used, it may treat an ICO as an issue of shares.
Power Ledger’s ICO is Australia’s first initial coin offering, so there is nothing to compare it with on the local investment scene.
No doubt, it won’t be the last such offerings. It is worth keeping in mind that as largely unregulated investments, ICOs are highly speculative investments.