What has happened?

The Australian Securities & Investments Commission (ASIC) has warned the public against initial coin offerings (ICOs).

What does this mean?

ASIC has released an investment warning about ICOs, calling them "high-risk speculative investments" and warning investors that they may lose some or all their money if a project fails.

According to the regulator, there has been a lot of hype around some popular cryptocurrencies, "but not all ICOs are cryptocurrencies", while some projects have turned out to be scams.

"You could lose a lot of money if you buy into an ICO without doing your research first," ASIC warned.

The Australian watchdog said that even though ICOs may sound similar to initial public offerings, there are no legal rights or protections attached to them.

Promoters of ICOs may also use the internet to raise money, but ICOs are not the same as crowd-sourced funding, which is regulated under Australian law and offers basic investor protections.

ASIC said:

"ICOs are speculative, high-risk investments. Many ICOs are for projects that are experimental, are at a very early stage of development or may not have even started yet. As a result, some projects may take years before they become commercially viable, if at all. A large number of ICOs fail or do not increase in value."

The warning goes on to explain that the 'white paper' that usually provides information about the ICO may be "unbalanced or misleading" and if it claims that the ICO is not a financial product, this may show that the promoter is trying to avoid regulation, "leaving you with no consumer protection".

Investors should also be wary about marketing tricks, such as using a celebrity to endorse the project or promoting it through social media and messaging apps, which gives a false image of legitimacy.

Unlike shares, ICO tokens do not come with voting rights, a promise of a profit share or ownership rights, without which "you won't have a claim over the company's assets if it fails".

"Most shares need to be offered to Australian investors using a prospectus. Some ICO issuers offer tokens that look or act like shares in a company, promising ownership rights or future payments. However, if there is no prospectus for a token offered under an ICO, it is probably not giving investors the same rights as a share or it may be operating illegally in Australia," ASIC warned.

Echoing other warnings from around the globe, ASIC listed some of risks linked with ICOs, such fraud, price volatility, or the investment being simply stolen by thieves as digital wallets are vulnerable to hacking.

ASIC first issued guidance for ICOs, entitled Information Sheet 225, in September 2017.

The Australian regulator may been ringing the alarm bells on ICOs, but this cautious approach does not extend to the blockchain technology underlying ICOs.

In its 2018-19 budget, the Australian government allocated AUS$700,000 to the Digital Transformation Agency (DTA) "to investigate areas where blockchain technology could offer the most value for Government services".

The cost of the measure will be met from within the existing resources of the DTA.

Created in 2015, the DTA helps government departments and agencies "undergo digital transformation".

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

Receive free news and analysis – written by Hogan Lovells' world-leading legal teams and tailored to your preferences –  by registering on Engage. You can also access our cutting-edge interactive Lawtech tools, designed to help you make better decisions and save time and money.

 You can also keep track of all the Engage content by following our LinkedIn page.