It was a strong start for Australia’s first initial coin offer (ICO) with Perth based company, Power Ledger raising $17 million in the first of two stages earlier this month. The company is on track to raise more than $30 million by the time the ICO closes.
Power Ledger launched a public pre-sale for their token generation event on 27 August and the first 100 million tokens were sold in just over 3 days. Up to a quarter of the tokens were sold within the first hour of the event opening. This is in addition to 90 million tokens already sold to strategic investors, bringing the total value of tokens sold so far to $17 million. The company commenced its uncapped public sale on 8 September 2017.
Power Ledger is using blockchain technology to create a renewable energy trading marketplace, where renewable energy asset owners and investors can sell surplus energy generated to consumers through established energy distribution networks or micro-grids. This allows energy consumers to participate in a new energy market, without the need for an upfront commitment or investment in renewable energy assets.
What is an ICO?
An Initial Coin Offering (ICO) is a fundraising mechanism that uses blockchain technology to sell tokens using bitcoin or ether to fund new projects. It is similar to an IPO where investors purchase shares of a company, though investors in an ICO receive no equity in the issuer. ICOs are a relatively new fundraising option, but one which is gaining popularity around the globe and also attracting attention from regulators. Compared to the stringent regulations surrounding IPOs, ICOs are basically unregulated fundraising schemes and this is raising some questions and concerns from regulators worldwide.
ICOs are most often seen in overseas markets where appetite is strong and increasing. During 2017, the total funds raised under ICOs or token generation events (up to late July) were US $1.7 billion. Some of the highlights have been:
- Tezos – raised a total of US$232 million in mid-July.
- Bancor - raised US$150 million in mid-June.
- Status – raised over US$100m in 24 hours in June.
The response to Australia’s first ICO seems to be promising compared to other global offerings, indicating there is an appetite for this type of fundraising in Australia.
We are closely watching the next release of tokens for public sale.
Current status of Regulation
Regulation of ICOs is currently either non-existent or in its infancy stage, with governments worldwide scrambling to keep up with technological developments in the rapidly moving space.
On 4 September, China released the results of their urgent review into ICOs resulting in a ban on ICOs being conducted in China. Approximately $400 million was raised in China in 2017 through the use of ICOs and those companies are now being requested to refund investors. This has led to a price crash of most cryptocurrencies over the past week.
On 24 August 2017, Canada also released some guidance on how ICOs are to be treated under exiting securities laws, with the release of CSA Staff Notice 46-307. While the CSA should be commended for offering some guidance, the conclusions are somewhat predictable. An extract from the Staff Notice is:
If an individual purchases coins/tokens that allow him/her to play video games on a platform, it is possible that securities may not be involved. However, if an individual purchases coins/tokens whose value is tied to the future profits or success of a business, these will likely be considered securities.
The Staff Notice goes on to state that the following test may be used to determine whether an ICO is an offer of securities (and thus required compliance with relevant securities laws):
- Is there an investment of money?
- Is the investment common enterprise?
- Does the investment come with expectation of profit?
- Would any expected profit come significantly from the efforts of others?
Our preliminary view is that while most ICOs will satisfy points one and two above, there are real questions as to whether or not points three and four would apply.
In Australia, ASIC have stated that while they are watching closely at the present time, the issue of tokens or coins are not regarded as issues of securities for the purposes of the Corporations Act. A recent quote from ASIC’s Greg Medcraft offered some insight into their thinking:
"They’re a very interesting concept. An ICO is not equity – you're offering basically something that is the product of the entity that is doing the launch. You're taking a bet on getting that product early. How different is that if I go to Kickstarter and I buy something – a watch – and then I get that watch and sell it in the future? It's no different, is it?”
Many other countries are presently updating theirs policies to deal with ICOs and we will keep you informed of any developments as they occur.
Implications for companies looking to raise funds
The vast majority of investors into ICOs are cryptocurrency speculators and many are not actually buying into a business model or product that has any ascertainable value, which makes this obviously dangerous for companies and investors alike.
Trust is an essential pillar of any market or economic system. Without it, a sustainable investment environment cannot be built. The current ‘wild west’ of the ICO space is, at present, a risky place for an investor to put their money, however, there have been success stories and many companies that have a conducted their ICOs are progressing in accordance with the representations that they have made to investors.
We are bullish on ICOs as a mechanism for early stage funding and any company that is looking at getting venture capital firms involved in their business owe it to themselves to at least explore the opportunity offered by an ICO.
We will have much more to come in the ICO space.