Initial Coin Offering (ICO) is a method of unregulated crowdfunding for new projects. They issue tokens – a kind of digital currency bought for cryptocurrency, usually Bitcoin or Ether. Start-ups use this option to avoid strict regulations of capital-raising process required by banks and investment funds. The name of the process is made on the pattern of Initial Public Offering but unlike it during ICO buyers do not purchase any ownership stakes of the company. Instead of that investors receive tokens (also called «coins») that can be used either to pay for the company’s services or to trade them as a regular cryptocurrency on a crypto exchange.
At the moment ICO is a neither fully legal nor illegal way of attracting investment. Its legal status, procedures and requirements are widely discussed around the world and different countries come to different conclusions. For example, Chinese, South Korean and some other countries’ authorities have utterly forbidden this way of crowdfunding. On the other hand several governments consider allowing ICOs to take place after some regulations. It might be seen in Estonia, Australia and Belarus. The U.S. Securities and Exchange Commission has recently ruled that all tokens distributed during ICOs are in fact securities and are subject to the regulations. In December 2017 SEC forced a California-based start-up Munchee to return $15.000.000 raised to the investors since there were violations during the crowdsale and the company received cease-and-desist order. This means that each company issuing a token, even if it is considered a utility token must be extremely careful when verifying if it can pass the Howey test and is not considered a security.
Since there are hundreds of ICOs at the market, it might be difficult for investors to choose the most prospective and valuable ICO. The main points that can help to make the best decision are:
1. Presence of all the documentation related to the product, team, token sale agreement and the project’s whitepaper. It is the primary source of information on the company and it is extremely important to be carefully reviewed.
2. Working Minimal Valuable Product (MVP) and customer base — this will show that it won’t take long for team to enter the market
3. Reputation of the team members, advisers and partners – being transparent is extremely important.
4. Escrow – a special account where the funds are held until the development is finished and the token sale is over.
5. Ratings of the project on the top ICO rating websites where the above factors and many more other features are mentioned.
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