Crypto World - 14.02.2019

ICOs: You Get What You Pay For

Check out this new study regarding ICO tokens by Demelza Hays, M.Sc, Research & Fund Management, Incrementum AG.

Initial coin offerings (ICOs) are commonly used as a cheap and fast way to raise capital compared to donation-based crowdfunding, whereby the tokens do not convey ownership in the token issuing company. Instead, token offerings that do convey ownership are investment contracts and therefore can be defined as equity token offerings (ETO), which is a subcategory of security token offerings (STOs). STO coins can represent a multitude of different investment contracts including equity, debt, profit-sharing, and voting rights.
This article describes the variants of ICOs such as Security Token Offerings (STOs), Digital Security Offerings (DSOs), Equity Token Offerings (ETOs) and Debt Token Offerings (DTOs).

Buyer beware: ICOs are not synonymous with utility tokens even though many firms doing ICOs claim their tokens are utility tokens and not securities. There are many fundamental problems with the concepts of both “initial coin offerings” and “utility tokens” including the fact that many ICO tokens have no direct link to the financial success of the issuing company and retail investors do not often understanding what the token represents. Also, ICOs that actually offer investment contracts but do not comply with security regulations such as having their prospectus approved by financial market authorities or filing for an exemption are actually illegal security offerings. Regarding the theoretical problem with utility tokens, currency risk in the purchasing power of the token makes it unsuitable for many of the applications that it is designed for.


Sole proprietorships make up 72% of U.S. firms but only account for 4% of revenue while corporations make up 18% of firms but account for 83% of revenue. One reason for this is that the shares of corporations are easy to trade. Unlike a sole proprietorship, partnership, or LLC, anyone can be a shareholder of a corporation without any knowledge or expertise of the company they are running. This enables corporations to raise substantial amounts of money on capital markets.

Crowdfunding, private equity, initial coin offerings (ICOs), and security token offerings (STOs) are just some of the ways investors are providing capital to small and medium-size enterprises (SMEs). Although the concept of crowdfunding goes back to 18th century book sales, the modern conception of crowdfunding is an internet phenomenon. Crowdfunding typically refers to entrepreneurs raising small amounts of capital from a large pool of investors online. There are several types of crowdfunding but the two relevant are donation-based fundraising and equity. Donation-based equity crowdfunding is where investors give or “donate” capital to a startup in exchange for a future good or service or just to support the idea. Popular sites for donation-based crowdfunding include Kickstarter that has raised over $3.7 billion and Indiegogo, which has raised over $1 billion. In contrast, equity crowdfunding is the crowd-sale of securities such as equity, debt, membership units, and convertible units. Equity crowdfunding has raised approximately $500 million since its inception in the U.S. in 2015.

Note: This is just an extract from the article, you can download the full pdf here.


The volatility of utility tokens issued during ICOs makes utility tokens poor mediums of exchange for goods and services. The price of utility tokens is often completely unrelated to the financial success of the company. Currently, there are arguably no examples of successful utility tokens or coins except for distributed ledger platforms that enable ICO issuance such as Ethereum and EOS; however, ICO tokens that offering an investment contract is an unregistered security offering, which is illegal.

This article is proposing distinct definitions for terms such as ICO, STO, ETO, and DTO. To reduce semantic arguments, this article is claiming that an ICO can only be used for raising capital for building cryptoassets that do not resemble investment contracts or securities. This includes utility coin or payment coins. Once the cryptoasset begins to resemble a security, the capital raising method becomes a security token offering. Unlike ICOs and donation-based crowdfunding, STOs, IPOs, and equity crowdfunding give investors skin in the game. However, STOs, IPOs, and equity crowdfunding have barriers to entry including compliance costs for issuers and minimum wealth levels for investors. Currently, there is no official listing of all of the STOs in Switzerland, Germany, Austria, and Liechtenstein. There is also no exchange that is officially licensed to trade security token offerings or digital securities offerings. More legal clarity on the ability for a digital token to represent ownership in a company is needed and more legal clarity on the functional equivalence of signing a transaction with a private key with a physical signature is needed.

Author: Demelza Hays, M.Sc, Research & Fund Management, Incrementum AG.

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