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ICOs: Financial Innovation or Modern Day Scam?

Traders Magazine Online News, November 16, 2017

David Weisberger

Much has been written recently about the ICO investing craze that has helped nascent companies raise an estimated $3 billion so far and, according to CNBC, even surpassed Venture Capital fundraising for a couple of months last summer.   Some of the stories of these vehicles raising money based on poorly written “whitepapers” and severely flawed business models have raised valid concerns, and has reminded many of us of the Dot Com bubble.  That said, both the underlying potential of the technology and the incredible public demand can’t be ignored.  The potential for ICOs to enable public participation in the funding of new blockchain related technology ventures is important, so we should be careful before dismissing the mechanism.  The SEC, despite recent press coverage, seems to share this balanced view.

The Wall Street Journal published an article recently with the headline trumpeting “SEC Chief Fires Warning Shot Against Coin Offerings.”  It quoted SEC Chair Jay Clayton making sense by saying “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.”

It is very important to understand, however, that there are two major things that Mr. Clayton did NOT say.  First, he did not say that ICOs would need to be treated the same as securities listed on the National Market System.  The disclosure requirements and financial standards for OTC securities, for example vary widely.  At the top end, in markets such as the OTCQX market run by OTC Markets, the disclosures and financials are relatively strict, but at the bottom end of the market, in the “pink sheets,” the requirements are relatively lax.   It is hard to understand why ICOs should have problems meeting those standards, depending on the size of the offering, so it is hard to see why this should cause a huge uproar.  (Perhaps the security regulations requiring that initial investors and founders need to hold newly issued securities for 12 months is troubling, but should not be a problem considering that it is early stage investing.)  This is particularly true considering Mr. Clayton’s past commentary on his desire to preserve innovative methods of investment.

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