Study on Initial Coin Offerings - New means of fundraising


At first glance, it is hard to believe and to understand the claim of enthusiasts that Blockchain technology is supposed to be comparable with the spread of the internet in the 90s.

It would therefore be a consequence of the technical, even disruptive innovations that occur in the world of tech: mainframes (60s), microprocessors (70s), PCs (80s), the Internet (90s), mobile phones/smart phones/social media (2000s and 2010s) – and arguably now Blockchain/Distributed Ledger Technology (DLT).

It’s true: Blockchain technologies have the potential to disrupt the way we communicate online. In a nutshell, one has to understand five aspects:

  • A Blockchain is a database…
  • Which is not stored centrally, but in a distributed manner…
  • From which data can per se not be removed…
  • And which allows for moving digital assets…
  • Under conditions predefined din a software (a so-called Smart Contract).

To be clear, Blockchain technologies allow digital assets to be moved instead of copied!

In the real world we can transfer a physical object to another person. Everybody is aware that this object has physically had a change in ownership. For example, a company share has always been issued on paper and it is clear to the public that the owner of the paper is the owner of the share. This has not been possible in the digital world, until now. Sending a document to another person via email is basically a copying operation. Neither the recipient of the email nor anybody else can be sure that the sender has deleted the document, unless an independent third party has proven it. This is the reason why banks are being used to act as trustees to store and confirm the ownership of digitalised shares.

Blockchain technologies intend to solve this issue and has the capability to actually move digital assets by proving that the sender of an asset no longer possesses it. It achieves what was done hundreds of years ago – transfer of a title connected to a physical object – but the object is now digital, not physical. The reason behind this is the use of cryptography. Only the owner of a certain private key can dispose of an asset. Since moving an asset means changing the corresponding key pair, the power of disposition only lies with the owner of the other private key who is the owner of the digital asset.

By combining this characteristic of Blockchains with the fact that there is no operator of a Blockchain (because it is run in a distributed manner by an undefined amount of so-called nodes) it is abundantly clear why the word 'disruptive' is used to describe this technology. It has the potential to change the way we communicate.

Many companies, from small start-ups to global players, are testing and working on use cases for their business. This process is ongoing and there are already some very promising ideas. However, the most discussed use cases currently are token sales – or ICOs (Initial Coin Offerings).

ICOs are means for companies to collect money. Instead of writing long business plans and conducting endless pitches, companies can simply create their own cryptocurrency, gather a community behind their project, do some marketing and write a white paper.

There is no generally recognised classification of ICOs. The Swiss FINMA uses the following terminology, admitting that there are also hybrid forms:

  • Payment tokens/currency tokens do not give rise to claims on their issuer. They are rather intended to be used, now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer.
  • Utility tokens are tokens which are intended to provide access digitally to an application or service, usually by means of a Blockchain-based infrastructure.
  • Asset tokens represent assets such as a debt or equity claim on the issuer. Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function, therefore, these tokens are analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the Block-chain also fall into this category.

Thanks to the ICO phenomenon, approximately 4 billion US dollars were raised in 2017. After a difficult start, ICOs are now becoming more and more professional and are also attractive for companies which raised and earned money with classical alternatives. This is not just hype – legislators and financial authorities have started to publish their opinions on ICOs.

The support of CMS is sought on many ICOs worldwide. Our aim is to provide token emitters with profound legal advice, based on a deep knowledge of the technologies behind ICOs. We share our insights with legislators and regulators, contributing to the development of the legal landscape.

This document is a brief guide on some of the legal challenges in certain jurisdictions and we hope you find it useful. Please reach out to our local contact persons for advice on ICOs, Blockchain and smart contracts.

Please click here to access the Initial Coin Offerings brochure.