iGaming Business magazine iGB 111 July/Aug | Page 141

Regulation
ICOS:
A HIGH STAKES GAMBLE?
Some start-ups are eschewing traditional forms of investment and instead turning to initial coin
offerings to raise capital. Are ICOs simply a smooth, unregulated path to quick and easy funds,
or will igaming companies going down that route encounter a bumpy ride, asks Nils Reid
It is a common misconception that Initial Coin Offerings (ICOs)
are an unregulated way for companies, and in particular
early stage companies, to raise finance for their projects.
Avoiding the traditional routes to financing, such as taking on
venture capital partners, ICOs are seen as a quicker and less
costly option, a mistaken belief propagated by the tech corporate
finance press’s portrayal of an ICO as a surefire way to attract
investment for your start-up.
The fact is that none of these points is strictly true. ICOs are
regulated and they are not a guaranteed quick and easy route
to financing. They do, however, have their place and for the
time being at least they seem set to continue to be part of the
corporate finance landscape.
What is an ICO?
The UK’s Financial Conduct Authority (FCA) describes an ICO
as “a digital way of raising funds from the public using a virtual
currency, also known as a cryptocurrency”. It is essentially
a form of crowdfunding where instead of the fundraiser raising
traditional, fiat currency through the issue of securities in the form
of bonds or shares, they instead raise cryptocurrency (such as
Bitcoin or Ethereum) through the issue of tokens.
Tokens fall into two broad categories: traditional security-like
tokens that offer holders rights which are akin to more traditional
securities (such as rights to dividend), and voucher-like tokens
that offer holders a right to participate in a future service, possibly
on discounted terms.
Tokens are tradeable in the same way as listed securities,
through established platforms that act as secondary markets
(assuming that, much in the same way as with listed securities,
there exists sufficient liquidity in the first place).
Which companies are using ICOs?
At the outset it was the cryptocurrencies themselves that
launched coin offerings and blazed the trail. But according
to the latest ICO Hot List, compiled by Ubex, the majority of
current offerings are for tokens that allow access to certain
decentralised services, market places or solutions.
Nils Reid is partner in the corporate services
department of Healys LLP. He advises clients on
a broad range of corporate and corporate finance
matters including capital markets, mergers and
acquisitions, private equity and joint ventures,
frequently with an international element.
In short, ICOs are not raising money for traditional business;
for the most part they are still a niche solution to a niche market.
How do ICOs work?
An issuer of ICOs will normally put out a white paper setting
out the details of the product, project or service that they are
looking to raise finance to develop. It will also include information
such as the broad business plan, use of proceeds and projections.
In this sense it is like a prospectus that an issuer might prepare
for the promotion and sale of its traditional securities. However,
unlike a traditional prospectus, which has to adhere to a strict
set of rules surrounding what it can, cannot and must say,
there is no analogous set of rules for white papers. This lack
of formal regulation is what has led many commentators to
mistakenly classify them as ‘unregulated’ offerings.
The legal bit: are they really unregulated?
Despite the hype to the contrary, often from within the
industry itself, ICOs in the UK are still quite heavily regulated,
just not in the same direct, targeted way that traditional securities
ar