In the last three years, the number of initial coin offerings (ICOs) in the United States has skyrocketed. The reason behind this growth concerns the many benefits associated with a coin offering. Early-stage technology companies are able to access the capital for development and growth long before traditional methods of funding are typically available.
ICOs are generally only available for technology companies. Companies that have built or intend to build a technology platform or service issue tokens, a form of cryptocurrency, that represents value on the future platform. There is a finite number of coins, so their value rises as the value of the company issuing (and backing) the coins rises. Investors want to purchase these coins at an early stage of development in hopes of cashing in when the coins rise in value.
The interesting part of ICOs is that investors often buy these tokens before the company has developed its service or platform. This is generally far earlier than an angel investor of venture capitalist is willing to purchase an equity interest. Also, the founders of the company retain complete ownership.
What Is Required for an ICO?
The benefits of the ICO appear to be a win-win for companies and investors. Unfortunately, there are a number of hurdles standing in the way of carrying out an ICO. The most notable is the ability to develop the various components that make up the ICO. The major components are as follows:
- Developing the Underlying Technology – The company must have individuals on board who can develop the company’s core value proposition. Being technological in nature, it normally requires software developer, programmers, and (in some instances) computer scientists.
- Preparing a Whitepaper – This is a disclosure document that informs potential investors of the nature of the company, the token being sold, and the terms of the sale. It is very similar to a private placement memorandum in equity sales.
- Developing a Token Smart Contract – This is the process of developing the actual token that will be sold. Remember, the token is not physical in nature. It is a form of computer file that must be created, transferred, and stored. Further, it must be compliant with the system on which it will be sold. If sold on an internal system, then the internal system must be developed. If sold on existing systems, it must meet specific requirements — known as “ERC20-Compliant”. Creating these types of file is very technically demanding. It requires the services of an expert in this type of software development and programming.
- Crowdsale Smart ICO Contract – This is a contract with the exchange that will be handling the ICO sale and delivery process. Basically, it is very similar to an underwriting agreement in traditional equity offerings. In this case, the contract is with a platform that specializes in the storage and sale of cryptocurrency.
- Smart Contract Audits – The company will need individuals who can maintain the ICO platform and token integrity. These are called audits. Failure to do thorough and routine audits subject a company to risks of the tokens being stolen, deleted, or corrupted.
- Legal Structure and Regulatory Filings – Most ICOs issue tokens that are backed by the issuing company. This means that the coins are subject to regulation by the Securities Exchange Commission and state regulatory authorities. The company must hire professionals who can navigate these legal requirements.
Where to Find ICO Talent
In this instance, you best friend is Google. You can do an internet search for companies holding themselves out as offering ICO services. Of course, you should be familiar with the services you will need prior to searching for these companies. This is a new space, and it is easy for unwitting companies to be taken advantage of.
Another option is to reach out to companies that have successfully undertaking an ICO. Ask them about who they hired for their ICO. It is possible that the companies will not be very helpful. They may want to keep their talent locked down for continued audit and token maintenance services.
Join affinity groups. If you get involved in technology forums, reddit groups, and other information websites, you will undoubtedly come into contact with individuals who have the skill and knowledge to carry out the technical aspects of the ICO.
Also, don’t forget that you will still need to meet regulatory requirements. This means hiring legal professionals to undertake the securities filings and disclosures necessary to comply with federal and state securities laws. Failing to comply with these regulations can result in all purchasers being able to reclaim their capital from the company.
Understanding what is required for an ICO is very complicated; but, this is the first step. Then, you will need to build a team to carry out the process. The cryptocurrency attorneys at LawTrades can provide you with the advice and guidance necessary to meet all of the business and regulatory requirements.