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2020/03/24 13:58:34

ICO (Initial Сoin Offering)

The mechanism of attraction of financing for projects or the companies for the purpose of development and product output (service) on the market. The investment attraction happens in cryptocurrency (bitcoins, air, litecoins, etc.). Unlike the IPO (public placement of actions) process of placement of tokens is not regulated: its carrying out almost does not require the financial investments, there are no minimum requirements to the issuer, audit and the other accompanying IPO procedures.

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How to estimate ICO

Main article: How to estimate ICO

2019

Investments into ICO failed for 95%

At the end of March, 2020 the CB Insights research firm published the report according to which financing by issue of shares bypassed primary placement of coins of cryptocurrency (ICO) and became a fixed asset of financing in a blockchain space.

The non-regulated boom of ICO in 2018 attracted $7.8 billion, but in a year financing at the expense of ICO was reduced more than by 95%, and in 2019 about $371 million were collected. On the contrary, financing due to issue of shares in 2019 was attracted by $2.8 billion. In the report growth of the decentralized financing is also noted. According to the report, asset cost on similar platforms for the beginning of 2020 was more than $1 billion whereas in January, 2019 there were only $300 million.

The CB Insights research firm published the report according to which financing by issue of shares bypassed primary placement of coins of cryptocurrency (ICO) and became a fixed asset of financing in a blockchain space

In 2019 807 venture bargains were concluded, i.e. only small decrease in comparison with 2018 (822 transactions) was noted. However the total attracted amount dropped approximately by 30% from $4.26 billion in 2018 to $2.79 billion in 2019. The activity of a venture capital considerably grew in comparison with 2017, nevertheless, the average amount attracted a blockchain companies was higher in 2017 ($4.22 million), than in the 2019th ($3.45 million).

Besides, in the report it is specified that cryptofirms are the main source of financing of DLT. According to researchers, these data indicate "commitment of the cryptocompanies to financing of own ecosystem". Though investments of hedge funds into a blockchain grow, CB Insights also notes that financing is generally connected with the funds specializing in cryptocurrencies.

The share of the USA in financing a blockchain startups year on year decreases — since 2015 investments steadily move from the USA to China. In general 53% of world venture investments were the share of these two countries. In 2015 financing a blockchain projects in the USA made 51% of universal volume, and in China only 2%. In 2019 31% while the share China grew to 22% were the share of the USA.[1]

The American financial regulator issued the first permission to ICO

In July, 2019 Blockstack became the first company which received from the U.S. Securities and Exchange Commission (SEC) officially permission to primary placement of tokens. Read more here.

2018

France legalized ICO

In the middle of September, 2018 the French government legalized primary placement of tokens (ICO). The local companies obliged to get permission of the regulator to carrying out such transactions in the country.

As the French finance minister of Bruno le Bruno Le Maire wrote on the Twitter blog, the authorities approved new regulations of ICO. Management on financial markets (Authorité des Marchés Financiers, AMF) will be able to control activity of startups and to issue them permission to holding a campaign for fund raising.

The government of France legalized ICO

However, the companies intending to carry out primary placement of tokens should "provide" specific guarantees for investors". Issuers of tokens should provide to AMF all necessary information that will allow buyers to remain informed on the solutions connected with the carried-out ICO.

The French regulator expressed concern about lack of accurate regulation concerning sale of tokens earlier "as integral risk factor of ICO" that increased the probability of losses, money muling and financings of terrorism.

According to Bruno le Mera, similar innovations "will attract innovators from around the world". Earlier French government lowered taxes on digital money for value to 19%.

The president of France Emmanuelle Macron tries to make the state attractive to business including connected with cryptocurrencies. In 2018 it started "The action plan on growth and transformation of business" (PACTE), one of the purposes of which — to create the legal base for attraction of financial resources using sale of tokens.

By September, 2018 in Russia legal status of cryptocurrencies, ICO and mining is not defined. Three bills designed to liquidate this space and to create regulation in the field of digital economy are introduced to the State Duma.[2]

More than a half of ICO failed

Nearly a half of primary placements of tokens  of cryptocurrencies  (Initial Coin Offering, ICO) in 2017 were failure. The MarketWatch edition with reference to the Bitcoin.com portal which, in turn, provides data  of the Tokendata ICO tracker reports about it.

In a research open data according to which in 2017 ICO was carried out by 902 projects were considered, from which announced 418 later (46%) the closing. Among the projects recognized unsuccessful 142 "fell off" at a fund raising stage, and 276 were curtailed within several months.

Failure ICO

As basic reasons of termination of work of such startups specialists of Bitcoin.com call attraction of insufficient quantity of money and plunder of money of investors.

Besides, the most part of new digital currencies were aimed at certain niches, like stomatology, freight transportation, the real estate — they were never going to attract wide audience. At the same time others were in fact just overdue attempt to repeat others success without any own advantages.

113 more projects were called "half failed" as their initiators do not keep the page on social networks and do not respond to requests. If to consider these campaigns unsuccessful, then it turns out that 59% a token sales in   2017 failed. On  support of these projects  about $233 million investments were attracted.

According to authors of the report, the market of ICO in 2017 became "the digital cemetery". Some startups did not manage to attract money, invested couple of hundreds of thousands of dollars in others, and someone received more than $10 million. However a small amount of operable projects, test starts and advantage to community became result all the same, experts consider.[3]

The Ministry of Telecom and Mass Communications prepared the rules ICO 

The Ministry of Telecom and Mass Communications developed  in the spring of 2018 of the requirement to release of digital tokens. The draft resolution of the government on accreditation of the organizations giving an opportunity of release of digital tokens is published on regulation.gov.ru. According to the document, the digital token is the record in the distributed information system created using cryptographic algorithms. Record certifies presence at its owner of the rights from the organizer of primary release of a digital token of its initial cost. Kommersant reports about it.

Accreditation will be issued to organizers of ICO for a period of five years. The procedure should become voluntary, and as her organizer the Ministry of Telecom and Mass Communications will act. The accredited organizations will be registered in Russia, their authorized capital will be not less than 100 million rubles, also they will obtain the license for development  production and distribution of cryptographic means.

Besides, organizers of release of tokens also should have the bank account in the Russian bank for transactions with the money received as a result of ICO. Issue of digital tokens can be carried out only for Russian rubles through non-cash payment. The organizer of ICO will be obliged to redeem them at nominal price from any bearer on the basis of the irrevocable public offer.

Besides, the project provides "a duty of the person which is releasing digital tokens to use the money received from acquirers of digital tokens only on the purposes connected with maintenance of an opportunity for obligation fulfillment according to the redemption of digital tokens at nominal price". The accredited organizer of ICO should control observance of these requirements.

10% of the funds raised for ICO are stolen

On January 22, 2018 analysts of Ernst & Young published a research according to which hackers stole the tenth part of the funds raised within ICO.

Experts analyzed 372 primary placements of tokens of cryptocurrencies (Initial Coin Offering, ICO) which total volume was $3.7 billion. About $400 million were stolen from this amount.

The phishing using which hackers managed to steal from organizers of this or that ICO up to $1.5 million every month became the most widespread method of cyber attack.

Hackers stole the tenth part of the funds raised within ICO

In a research it is noted that rates of investments in ICO slowed down by the end of 2017. So, in November the goal was achieved by only 25% of ICO while in June this indicator was measured by 90%.

According to Paul Brody (Paul Brody) supervising in Ernst & Young a subject a blockchain innovations, problems which organizers of ICO in achievement of the purposes face are partly caused by the low quality of projects and difficulties which arose within the previous projects. After the explosive growth of ICO the large volume of financing then the quality of transactions began to decrease was attracted, he noted.

«
We were shocked with quality of some business plans, we revealed appreciable errors in coding and conflicts of interest between the companies which are releasing tokens and community of tokenovladelets — Paul Brody told Reuters agency.
»

ICO often will organize for financing of new technology platforms or creation of business which it will be connected with cryptocurrencies and a blockchain. At the same time the majority of such projects has no need for a blockchain and cryptocurrencies at all, auditors noted.

The USA where using this tool business could attract more than $1 billion investments became the world leader in carrying out ICO, according to a research. Further Russia and China — $452 and $310 million respectively follow.[4]

2017

The Central Bank and the Ministry of Finance submitted the bill of regulation of ICO

The Ministry of Finance and the Central Bank submitted the bill of regulation of ICO at the end of 2017. According to it the cryptocurrency is defined as "other property", ICO —  as a type of a kraudinvesting.


"When developing the bill we tried to avoid temptation to adjust turnover of digital assets and attraction of financial resources using digital assets as we regulate financial markets" — RBC quotes the Deputy Minister of Finance Alexey Moiseyev.

So, the bill defines cryptocurrency as "other property", and ICO — as a type of a kraudinvesting (the tool for attraction of the capital in startups and small businesses from a wide range of microinvestors).

Besides, the ministry suggests to limit the volume of the funds raised on one ICO and volume of investments in ICO from unskilled investors.

In particular, at the first stages it is offered to limit the amount of the funds raised during ICO  to 1 billion rubles, and to unskilled investors at the same time to permit to invest no more than 50 thousand rubles in tokens. Also it is offered to create special depositary for storage of smart contracts, and — on a voluntary basis to disclose to organizers of ICO project information and the financing collecting purposes.

Belarus legalized cryptocurrency and ICO

The president of Belarus Alexander Lukashenko signed in December, 2017 the decree "About development of digital economy" which legalizes ICO, cryptocurrencies and smart contracts[5]. According to A. Lukashenko,  a main goal of the document — to create such conditions that the world IT companies came to Belarus, opened the representations, development centers and created the product demanded in the world.

EY: through ICO more than 3.7 billion dollars are attracted

In spite of the fact that demand of investors for participation in ICO remains high, the share of projects which achieve the desirable goals on fund raising, gradually decreases from the middle of fall of 2017[6].

As researchers of Ernst & Young company note, it is connected with the fact that investors become more careful, and regulators become more active at signs of violation of the law.

Within the research of EY "Market of ICO" company work of 372 projects, more than 100 in details is analyzed (87% of total amount of the funds raised through ICO). The vast majority of ICO projects use the Ethereum platform — 77%, Custom Platform — 13% is in the second place, the Waves platform — 4% closes top three. Researchers of EY note that because the Ethereum platform is overloaded because of popularity, the growing demand increases cost cryptocurrencies Ethereum, and as a result, the cost of ICO.

The volume of the raised funds through ICO is more than 3.7 billion dollars. At the same time the leader is the USA — more than 1 billion dollars, Russia is on the second line — 310 million US dollars. In top-5 Singapore, China and Hong Kong (over 200 million US dollars) enters. At the same time Moscow advances Silicon Valley on the number of projects — 48 against 38, on the third place New York — 27.

The basic that defines capitalization and cost of a token, is preparation and carrying out ICO. There are two main methods: in the first case the volume of attraction is limited and tokens are implemented at the fixed price. As the result — arises an agiotage, and time of carrying out ICO is significantly reduced. So, 10 projects of champions raised funds with the average speed of 300 thousand dollars of the USA per second. In the second case the volume of tokens is not limited, after the termination ICO tokens are distributed in proportion to all investments. The share of tokens is blurred very strongly therefore there is no possibility of assessment what to result in big volatility. It attracts inflating of assessment of basic cryptocurrency and tokens.

It is clear, that large volumes of ICO draw special attention of hackers. According to Group IB company, more than 10% of means of ICO are lost as a result of the attacks. Malefactors use phishing tools and crack the websites. Authors of a research note that now in Russia there is no uniform position concerning tokens and cryptocurrencies. According to the current legislation, the ruble is the only instrument of calculation, and creation of currency substitutes is forbidden.

Data of Starta Ventures

The core infrastructure on a blockchain and legal ICO which were initially used in a blockchain community belongs to the first ICO type. These ICO existed to hype which rose in 2017, and they will not get to anywhere. Starta Ventures predicts further development of a trend on ICO investment of infrastructure projects as the technology of a blockchain develops and find great popularity in "the real world"[7].

The second ICO type is ICO of niche products which it was not initial in the system of a blockchain. Such ICO is used for the investment attraction not to give a capital share to venture investors. ICO of this kind reached the peak of the popularity in the third quarter 2017 — then the companies which were at early stages of financing raised improbable quantity of money. But in process of market development such ICO will disappear as they are not competitive and are not connected about a blockchain community. It was already clear in October-November, 2017 when a huge number of such projects could not attract a minimum amount the expected investments.

Starta Ventures note that such ICO will become extinct until they fit into traditional model of venture investment and will become a part of infrastructure which works by rules.

Trends of ICO

ICO becomes too expensive occupation for startups:

Days when the startup could attract millions of investments by white paper only one and the beautiful website, behind. For the last months the average cost of carrying out successful ICO flew up to heaven because of the huge volume of new primary placements of tokens. Personal experience in carrying out ICO and consultations in this process of the third-party companies allow Starta Ventures to draw a conclusion that the cost of carrying out successful ICO not only is directly connected with an ultimate goal, but also exponential grows as every day there are more and more new ICO.

The cost of carrying out successful ICO reached $500-700 thousand that is equivalent to a quite good sowing round. If to consider different legislative nuances, then for a normal startup start of ICO looks less attractively, than traditional methods of the investment attraction.

Average size of expenses on ICO
What is included by these expenses

Process of ICO of investment leaves in offline

Process of the investment attraction through ICO becomes more and more similar to carrying out a typical round of venture investment over time. Now ICO even more often passes on offline - meetings with funds and a blockchain conferences where projects try to contact the elected godfathers of bitcoin. Digital marketing means, using it was possible to advance easily ICO which several months ago, already became outdated because potential investors are filled up with advertizing of the next new projects.

Considering the number of new ICO, kraud-investors rely on reputation of specific founders of the project more and more and look consultants at advertizing less. Thus, the main attention switches from digital marketing to direct interaction and attempts to contact serious names in the market.

ICO 2016-2017 Starta

On ICO stole already $300 million

For 2017 through ICO 3.5 billion dollars were attracted, at the same time 300 million from them were stolen, reports the banki.ru[8].

Kaspersky (earlier Kaspersky Lab)" shared statistics with users ". The interest of hackers in ICO, according to specialists, first of all is connected with large sums which are invested by participants – deposits average 5 thousand dollars. Hackers developed several methods of fraud connected with ICO. The most popular of them – an attack to the carried-out ICO. Also hackers use the phishing sites, spam letters convincing to invest in fake ICO.

Attacks on cryptocurrencies for the last year increased. Several main types of the attacks are revealed. First, it is technology of mining. Specialists noted growth of number of the virus websites which mine cryptocurrency of users. Secondly, incidents of corporate mining when for the purpose of hacking the staff of the companies uses working servers secretly from employers became frequent. At last, in Russia the case of transition of the attacks on cryptocurrency from network to the real world was recorded – Roma sold cryptocurrency on streets in the form of coins.

Token Report: 75% from 65 largest ICO can get under regulation of SEC

According to the research Token Report, tokens of nearly 75% from 65 largest ICO can get under regulation of SEC as securities. In a research information on was considered whether creators of draft statements about a potential benefit for investors published, and whether the startup has working products.

Only for the first 10 months 2017 startups already allegedly attracted more than 3 billion dollars through ICO. In September the digit was only on a mark of 800 million, and in April the value was less than 100 million dollars. The number only of the finished primary placements exceeded 200.

In July, 2017 SEC (SEC) told about the risks connected with ICO. Then SEC defined tokens of the The DAO project as securities. Only the qualified investors should be allowed to security purchase, and tokens should be registered in SEC. Regulators can also demand to return all money to investors and to fine organizers of the project.

"It is not the exact science. Everything that ICO projects can make — to consult with lawyers and to configure the work so that to reduce the probability that SEC interprets a token as the security", - the co-founder of the CoinSchedule ICO tracker Alex Mikhaelis tells.

To define, the token is the security, SEC uses the standard test of Howie which appeared after scandalous legal procedure in 1946. According to this test, the token can be recognized the security if it is investment into the enterprise with waiting of profit. And profit should arrive generally from the third parties. According to the lawyer from Cooley LLP Marko Santori, under these criteria even cryptocurrency exchanges can get.

In 2017 most of organizers of ICO say that they are exempted from regulation as they release technical tokens. Because of it (according to the organizer of ICO) they are not qualified securities, relying on Howie's test.

The lawyer Meyers&Heim, Robert Heim, earlier the assistant administrator of department of SEC in New York, told how startups can protect themselves from regulation. It is necessary to limit ICO to sale of tokens to accredited investors and to provide more information in the White paper (for example, to tell about conflicts of interest, the salaries of heads and risk factors).

"People want to protect the investments. If they invest money, and it turns out that violation of the law about securities takes place, then the company will not be a successful candidate for investments".

Some companies try to use approach of Simple Agreement for Future Tokens (SAFT) in which development the Cooley company participated. According to this scheme startups issue the purchase options of tokens instead of tokens. However because of it the companies can appear in sight of the Commission on urgent exchange trade (CFTC). At the same time many startups believe that tokens fit the definition of virtual currencies (CFTC is not going them to regulate).

However, the director of financial technical-strategy in Autonomous Research Lex Sokolin considers that startups the fact that buyers of tokens participate in ICO waiting for profit should disturb.

Putin charged to regulate ICO

In October, 2017 the President of Russia Vladimir Putin charged to the government and the Central Bank of the Russian Federation to provide  regulation of public attraction of money and cryptocurrencies by placement of tokens (ICO). It is said   on the Kremlin website.

It is going to settle by analogy with IPO regulation ─ primary securities placement. The ruble is recognized the only legal means of payment for cryptocurrency. By December 20, 2017 based on the Central Bank will create the test platform for approbation of "the innovative financial technologies" before their legislative settlement.[9]

Putin charged to the government to register regulation of cryptocurrencies

Determination of such concepts as "technology of the distributed registers", "the digital letter of credit", "the digital mortgage", "cryptocurrency", "token", "smart contract" and "mining" will enter to the legislation.

Besides, the government and the Central Bank will need to set requirements to the organization of mining, to think up the principles of registration of miners and taxation for miners.  Amendments in the legislation should be prepared till July 1, 2018.

Till March of the same year the Bank of Russia and the government should think over uniform payment space for the countries of the Eurasian Economic Union in which new financial technologies will be applied (including blockchain technologies).

The Presidential Administration prepared the list of instructions according to the results of a meeting on digital technologies in the financial sphere which  took place  on October 10, 2017.

As the Kommersant newspaper notes, earlier heads of the ministries and departments agreed about need of regulation of processes of issue of cryptocurrencies, their address and mining. The Ministry of Finance until the end of 2017 is going to define basic regulatory positions for the new market and "make the frame law".[10]

The first case of fraud on ICO was opened in the USA

The USA will for the first time take to court for fraud in the environment of ICO. In the message[11] the U.S. Securities and Exchange Commission (SEC) announced freezing of all transactions and the termination of ICO for REcoin Group and DRC World (also known as Diamond Reserve Club).

According to SEC, the owner of the companies Maxim Zaslavsky suggested investors to invest capital to the real estate and gemstones. He claimed that the company uses legal broker and accounting services. However, according to the Commission, the company did not receive these services. Also the head of REcoin distorted the real amounts of the involved investments, having specified them in $2-4 million when their actual amount made about $300 thousand.

At the moment Zaslavsky's assets are frozen, and SEC began investigation. In case of establishment of fault the entrepreneur will have to return all invested money to investors and to pay penalties.

In turn Maxim Zaslavsky expressed readiness to return money to clients and noted, his company misled nobody, report[12] "Vedomosti".

Prohibition on carrying out ICO in China and South Korea

After China the authorities of one more economically developed Asian country - South Korea - decided to draw close attention to how there is a situation in the market of cryptocurrencies. And, the attention of the state more complicated life to participants of this market, than added them optimism. Thus, it is about repetition not of the Japanese, but the Chinese scenario.

The solution of the regulator of financial market of South Korea – the Commissions on supervision of the financial sector means – to prohibit all forms of carrying out ICO. The regulator considered the basis for introduction of the ban the fact that in some cases the raised funds were allocated to unproductive or speculative spheres and also the fact that using cryptocurrencies there are additional opportunities to avoid payment of taxes. Besides at ICO investors have more chances to fall a victim of fraud. As a result the regulator warned about penalties which will be applied in relation to the companies and persons organizing new ICO and specially emphasized that control over trade in cryptocurrencies should be strengthened.

The decision of the South Korean commission followed less than in a month after introduction of similar measures by the People's Bank of China. And as well as at the beginning of September, 2017, the cryptocurrency market reacted with time falling of quotations and fast recovery to almost same values. And, this time depreciation of bitcoin was not so considerable. According to us this results from the fact that the volume of the South Korean market of cryptocurrencies is significantly less than Chinese. It can also demonstrate that the market of cryptocurrencies becomes steadier and ceases to react to statements and actions of regulating authorities sharply.

It is also important to note that statements of finance regulators of China and South Korea matched nearly to the last comma. Meanwhile financial markets of these countries very strongly differ from each other. In relation to the Chinese market experts periodically use determination "authoritative", meaning the excessive number of the restrictions set by the state whereas the market of South Korea is recognized as one of the most liberal in the world.

The contradiction this seeming as in these statements is traced by a background one more subject especially important for the Chinese authorities. We speak about control over financial flows. For Beijing the main priority of the pursued economic policy is financial security. Therefore the purposeful policy on restriction of the shadow banking sector, illegal mechanisms of crediting, legalization of criminal acquired income and cash outflow from the country leads to the fact that the Chinese government introduces restrictions for all financial mechanisms which can promote an output of cash flows from under control of the state. In 2017 such mechanism are cryptocurrencies.

At the same time you should not consider the restrictive measures entered in China and South Korea as the final decision. These actions are intended to give time to regulators to develop the rules of the game arranging everything the parties. Liquidation of gray zones in the legislation will allow to give to cryptocurrencies accurately designated legal status, will introduce them into economically circulation and will protect the interests of potential investors in disputable cases – for example, at emergence of problems with project implementation for which funds were raised using ICO. For this purpose the Commission on supervision of the financial sector of South Korea is going to get rid of anonymity at performing transactions with cryptocurrencies. As one of options the possibility of introduction of an authentication system is considered. Also development of mechanisms on tracking of suspicious transactions is planned.

Until new rules of the game are published, Asian investors will look for marketplaces in the countries with more friendly legal climate in relation to cryptocurrencies. Japan which recognized cryptocurrencies as means of payment in April, 2017 can become such smooth water, - Oleg Yakushev, the expert AO IK of TsERIH Capital Management considers.

On the same day, when in South Korea it was announced restrictions, the State Agency of financial services of Japan approved 11 companies as operators of the exchanges on exchange of cryptocurrencies. In addition to obligatory registration in the government, such companies are obliged to create a powerful computer system for ensuring stable work of the exchange, to provide identification of the identity of clients and also to respect the rules on anti-money laundering and some other requirements. At the same time the Japanese authorities are not going to prohibit attraction of financial resources using ICO. In the long term it can lead to the fact that more than 60% of transactions with cryptocurrencies will consist on the Japanese marketplaces.

Carrying out ICO for $1 billion for the first half of the year

For the first half of the year 2017 through ICO more than $1 billion[13] were attracted[14]. At the same time in 2016, according to[15], on ICO only $102 million were attracted. Placement of tokens of the Filecoin project is considered the largest ICO (development of the decentralized network for data storage) during which in August, 2017 it was succeeded to attract $257 million.

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