Investing in fineTeck: ICOs

ico

Initial supply of tokens (ICO), what is it?

With the rise of virtual currencies and digital equities, some start-ups are using ICO (initial coin offering), also called token sales, to raise capital. The company creates a new virtual coin or token that it proposes to sell and distribute to buyers using chain block technology. Investors should be aware that ICOs differ significantly from initial public offerings (IPOs). Unlike shares, tokens generally do not confer any ownership rights in the company, but also, unlike bonds, ICOs do not imply that investors lend money to the issuer. On the contrary, it is a bet on new, highly technical and complex products and investors can therefore lose part or all of their investment.

A ICO involves the creation of a new virtual coin or token by a company seeking to raise funds. In general, the company announces the amount of capital it wants to raise, in this case it is said that the ICO is captive. Otherwise it is uncapitalized (example TEZOS which managed to raise more than $230 million in bitcoin and ethereum (ETH) in July 2017), and fundraising continues until this amount is reached or the collection period expires for uncapitalized ICOs. ICOs are conducted online, and buyers use cash, such as the US dollar, or virtual currencies, such as bitcoin and ETH, to pay for the new tokens.

To date, companies using ICOs as a method of raising capital are generally start-ups that use chain block technology as part of their business model to provide a particular service or product. These companies distribute the new ICO tokens to buyers via an international and decentralized exchange network based on chain block technology. This network involves a distributed database maintained on a network of computers connected on a peer-to-peer basis. Network participants (called block miners) can share and store encrypted records in a decentralized way, which means that there is no centralized server or intermediary.

Companies that issue tokens generally promote the offer through their own websites and through various online forums of distribution blocks and virtual currencies. Potential investors cannot receive a prospectus; companies often publish a white paper describing the project in every technical detail they are seeking to finance.
As a result, the offer and sale of these virtual coins or tokens are subject to federal securities laws, which is rarely the case. Indeed, in the majority of cases, the tokens sold are supposed to be used on the platform that only exists, at this stage, on paper. According to the SEC Bulletin, some fundraisers may lead buyers to believe that they can expect a return on their investment. Buyers could also be informed that there will be an opportunity to sell the tokens on a secondary market or an online virtual currency exchange, although these secondary market liquidation locations are not guaranteed.

Given the huge amounts of funds raised with this mechanism, financial market authorities are beginning to take an interest in lending to set up control and regulatory mechanisms.

The SEC has decided to regulate in stages. At present, digital equities and virtual currencies are subject to traditional securities regulation. The AMF has taken the same path, unlike China, which has decided to ban ICOs and freeze the activity of all virtual currency trading platforms under the pretext of limiting capital flight. Indeed, the Chinese authorities have been studying the Chinese appetite for Bitcoin since the beginning of the year. As a first step, they considered setting up anti-money laundering rules on virtual currency exchanges. But the governance challenges for Beijing have increased as virtual currency prices have increased, resulting in the decision to ban all activity until the appropriate technical means are in place to better control all players in these new markets.

Despite the fact that the market for chain block technologies continues to grow rapidly, the future remains uncertain due to regulatory constraints that could change the way these markets operate by imposing more and more restrictions. Some analysts remain very sceptical and talk about a speculative bubble that is being set up just like the bubble we had during the early days of the Internet.

Sahraoui ZIED


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