While the ICO market is showing no signs of slowing down, a study by an Amsterdam-based company that specializes in rating ICOs, ICO Rating, has highlighted that a total of 412 projects raised a whopping $3.3 billion in the first quarter of 2018 alone. This figure represents a five percent increase over the capital raised in the last quarter in 2017.
The most shocking revelation made by the study, however, was that 46 percent of the companies looking to raise capital did not have actually start any development until the date of the ICO, a worrying concern for the industry.
Highlights of the Report
The research, titled ‘ICO Market Research Q1 2018,’ noted the total amount raised by the ICO industry to be at around $6.14 billion. It reported that only half of the total companies managed to raise an amount that exceeded $100,000. While the Telegram ICO, better known as the TON project, managed to bag $1.7 billion, it was not considered in the sample size.
The report highlighted that several companies tend to not disclose internal management, capital allocation or operational structure. Furthermore, nine firms that had managed a successful ICO closed down.
Legal Hurdles for ICOs
Many countries and financial institutions do not view ICOs as a legal source of fund-raising or the issued token as a security. This makes legality a key problem of the industry. However, more than a quarter of the companies involved in ICOs actually had no legal entity at the time of raising capital.
The U.S. Securities and Exchange Commission Chairman, Jay Clayton, issued a statement in December 2017, stating, “A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.” He then said:
“Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.”
There could be one possible way for any company to do an ICO without triggering the SEC’s registration requirement. For this, the initial coin offering has to be structured in a way similar to that employed by companies manufacturing physical products, using a Regulation D exempt.
SEC Intervention in the ICO Market
In December 2017, the SEC forced a California-based company to temporarily suspend its ICO after it grew suspicious amid registration concerns surrounding the company. The company in question, Munchee Inc., was later forced to return all capital raised by the ICO to its investors. The company also consented to the cease and desist order of the SEC.
Later in January 2018, the SEC obtained a court order to suspend Arise Bank’s $600 million ICO for a decentralized bank. According to CNBC reports, the SEC said in its complaint that:
“The ICO is an illegal offering of securities because there is no registration filed or in effect with the SEC, nor is there an applicable exemption from registration.”
A report by Ernst and Young highlighted that ten percent of the total combined amount raised by companies from an ICO had been lost to hackers. The study said that regulators were now beginning to regulate them rather than ignore them.
“ICOs have become synonymous with hype and excessive risk,” said the report, before adding, “The future of ICOs will be determined by the transparency of blockchain technology and the ability to set new standards that are accepted by all participants.”