Raising Capital through
an ICO (Initial Coin Offering)

An ICO, or initial coin offering, is an increasingly popular fundraising method which is primarily used by recent start-ups. Most of these start-ups aim to offer products and services which are usually related to and tailored for the cryptocurrency space. Investors buy into the offering and receive a cryptocurrency token, which represents a stake in the issuing company or start-up.

Here at Swordblade, our advisors would work with known third parties to enable our clients to use an ICO to move their company and business forward into the public domain. By using our network, we ensure that the cryptocurrency expertise is provided through a third party, alongside our own superb advisory services.

What is an ICO?

ICO’s are effectively stocks, occasionally including an additional software service or product alongside the offering. ICO’s can be an effective way to go public, due to the lack of regulations around their offerings, and the fact that the token offered is essentially equity tied to the performance of a company – only in crypto form.

Many ICO’s have yielded enormous returns for investors, but many have failed; performing badly or sometimes, being fraudulent. The lack of regulations around ICO’s mean that investors must be extra cautious in their due diligence and research into a company – which is why partnering with known experts and advisors can be beneficial throughout the process of issuing tokens.

For an investor to participate in an ICO, they will usually need to purchase a cryptocurrency beforehand, and get up to speed on the basics of how crypto wallets and exchanges work – to feel confident in the offering going ahead. ICO’s are on the bleeding edge of mechanisms to take companies public, and so many investors will not be up to speed, or confident in the process at first – though this can lead to a number of investors who are comfortable with the risk feeling bullish about the prospects of a company that is aiming to push the envelope of change.

The FCA interprets the risks and rewards of ICOs here, stating that the risks are:

Unregulated space: Most ICOs are not regulated by the FCA and many are based overseas.
No investor protection: You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.
Price volatility: Like cryptocurrencies in general, the value of a token may be extremely volatile – vulnerable to dramatic changes.
Potential for fraud: Some issuers might not have the intention to use the funds raised in the way set out when the project was marketed.
Inadequate documentation: Instead of a regulated prospectus, ICOs usually only provide a ‘white paper’. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks.
Early stage projects: Typically ICO projects are in a very early stage of development and their business models are experimental. There is a good chance of losing your whole stake.

Cryptocurrency is expanding further into governmental spaces, for example in Switzerland, tax payments have come to be accepted in cryptocurrency, paid either in Bitcoin (BTC) or Ether (ETH). The benefits of this can depend on the token offering, as this then might allow one to offset any Capital Gains Tax as the token’s price fluctuates. Furthermore, Swiss politicians have been welcoming of crypto-pioneers, as FINMA (Swiss Financial Market Supervisory Authority) has set out clear guidelines for cryptocurrencies, and government working groups are busy drawing up plans to guide blockchain developments into the future.

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How an ICO Works

When a cryptocurrency startup wants to raise money via an ICO, a whitepaper is created to initially outline the project. This would normally include a combination of:

Throughout the campaign, the tokens of the currency can be purchased with fiat or other digital currencies by enthusiasts, supporters and investors – which is the equivalent to equity in the company. However, if the money raised does not meet the minimum funds that are required by the firm, money may be returned to the backers and the ICO deemed unsuccessful. Otherwise, if funding goals over time are met, then the money is used to pursue any business or project goals.

There are no major regulatory issues, due to cryptocurrency typically being a peer-to-peer space, outside of the scope and verification of governmental influence. However, it must be recognised, that in the United States, the SEC has intervened in the past. In the case of Telegram, who raised $1.7bn in an ICO in 2018 and 2019, had an emergency action filed against them by the SEC to obtain a temporary restraining order, due to alleged illegal activity on behalf of the development team. Telegram had to return $1.2bn to investors and pay an additional penalty of $18.5m.

In 2019, ICO activity began to decrease rapidly with the introduction of HoweyCoin by the US Securities and Exchange Commission. Named after the famous Howey test, used to determine whether an investment transaction represents an investment contract or not. This standard test was used to charge Kik, who raised $100m in an unregistered ICO, with unlawful sale of a security. In the SEC’s eyes, an ICO is no different from an IPO so long as the underlying token raises money for an already existing business and does not operate independently of that business.

The European Securities Market Authority concluded that ‘certain crypto-assets qualify as financial instruments’ and therefore fall under European financial services legislation. However, the majority of ICO’s and ICO tokens do not fall under such regulation and remain free of regulatory oversight, although there is a review ongoing.

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The Process

It must be noted that ICO’s have a few structural differences from IPO’s. ICO’s are, as discussed, largely unregulated – meaning the SEC, FCA or any other financial regulatory body does not directly oversee them. ICO’s are also, due to their decentralisation, freer to be structured in the way an issuer would like. This leads to the process of an ICO being different and almost bespoke for each different token that is offered.

Initially, after engaging Swordblade as advisors, we would work with reputable law firms from our network, alongside service providers to create a robust ICO offering. This collaboration would be particularly notable throughout our technical and legal specifics – though overall risk profiling and advisory would remain under our expertise.

How can an ICO be structured?

Each token sold has a pre-set price, the total token supply is static and does not change. Once the tokens run out, that’s it.
Tokens remain static in their supply, but as funds received increase, the token’s price also increases relative to this. The more funds received, the higher the price of the token overall.
Token price can be static, but without a limit on the total supply, meaning that as funding is received, the more tokens are issued with very few limits on how many can be issued.

The process of an ICO could take the form of:

Pre-public engagement phase, including all processes prior to the big announcement is done, completing processes prior to the first announcement, such as getting the token up and ready, appropriating any features that are to be included to make it stand out. This can take between six months and a year to complete.
1. Initial idea, question of whether the project requires an ICO? Proof of concept of the integration of a cryptocurrency into the project in a meaningful way.
2. Understanding competitors, and researching the legal side of things to find out whether ICO’s are legal (E.G., the Chinese Central Bank has banned many tokens across the last half decade from being used in transactions).
3. Creation of an ICO token and distribution plan.
Post-public engagement phase, takes around three months, to gain public attention, traction from investors, whilst still being short enough not to be forgotten about.
1. Initial white paper offering. Technical document describing the token and its usage. See ‘how an ICO works’ above.
2. Website launch, including information like a roadmap, bios, real life case studies, an explanation of products, any other documents investors might find useful, possibly even contact information in order to gain the trust of investors. This is relatively similar to an Information Memorandum, which could be produced as an alternative – though it is a mark of ‘traditional’ corporate financial matters.
3. Any other PR and marketing, throughout the cryptocurrency community and wider financial sector.
Token offering either to private investors. This phase would normally take around one month, and tokens would be sold via the established website for the project. In 2014, Ethereum’s ICO raised 3,700 Bitcoin in its first 12 hours, equal to approximately $2.3m at the time. The full ICO lasted 42 days, raising $18 million.

Above all else, when considering an ICO, the risk factor for business owners must be considered. For example, in 2017 and 2018, the golden age of ICO’s, almost half of all offerings failed to raise any money at all. Only 24% of all ICO’s actually met their minimum funding goal. ICO’s are on the up, and are clearly a forerunner to be the financing method of start-ups and businesses in the future, but must still be considered with this initial risk in mind.

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Next Steps

If your company is planning to go public and raise funds on the capital markets, we look forward to hearing from you.

The easiest way to get started is to request a free evaluation. By providing minimal information about your company and capital needs, we will be able to provide you with a quick assessment by email. In most cases we can tell you if your business is ready to go public, or not yet.

We’ll also let you know if we think that Swordblade & Co are a good fit for your flotation plans, and anything else that we may think can help you.

Alternatively, if you are ready to talk in depth about floating your company, we recommend you arrange a paid consultation with one of our partners. It can usually be scheduled within a few days and is the fastest way to get detailed advice.

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