Initial Coin Offerings
Switzerland has entered the global marketplace for ICOs. These ICOs are set to bring about a permanent change in corporate financing. They are legal, provided the rules are followed.
Text: Matthias Niklowitz, Images: Nathan Kaiser, 12. October 2017
What is an ICO?
Nathan Kaiser: ICO stands for Initial Coin Offering. We also talk about TGEs, which stands for Token Generating Events. New tokens or coins are issued in return for cash. Strictly speaking, this is no longer corporate financing in many cases, as these days, the revenue generated by ICOs does not necessarily go to the company or the entity generating the tokens.
What are the characteristics of the tokens?
Kaiser: The characteristics of the tokens are also becoming increasingly diverse. In this regard, we don’t necessarily talk about cryptocurrencies anymore, as many new tokens are designed as tools or utility tokens, the monetary value of which is purely a background function.
ICOs sound a lot like IPOs – what are the most significant differences?
Kaiser: The majority of ICOs are not an investment in a company and there is no intention to subject them to the typical funding requirements. In addition, tokens are not intended to replace shares. They do not represent any ownership status, nor do they confer any voting or similar rights.
What do you, as an investor, receive when you invest money privately in an ICO?
Kaiser: As has already been outlined, there are very few rights when compared with shares. More recent ICOs go so far as to classify the cash payment by the “investor” as a donation. The investor has little more than trust in the issuers of the coins.
What kinds of companies undertake an ICO?
Kaiser: ICOs come from all manner of different places - from larger, existing companies with millions of existing customers to the backyard operation being run by three novices. The ideas, business models, maturity, specialist technical knowledge and legitimacy are just as varied.
Can Swiss SMEs also participate?
Kaiser: Yes, as a general rule, the Swiss legal system and the Swiss authorities do not prevent this. In my view, even the message that was recently released by the Swiss Financial Market Supervisory Authority (FINMA) should not be understood to be putting an end to this. FINMA has said that ICOs are permissible, provided they are in line with the current legal system. This does not give free rein, but it does give the green light to those who stick to the rules.
If SMEs have a suitable business idea, an ICO allows it to be developed quickly on the basis of the level of interest in that idea and also enables the equally rapid establishment worldwide of a new digital ecosystem. It was not previously possible for SMEs to achieve an economy of scale of this magnitude.
Why don’t any large companies do this instead of flotation on the stock market or capital increases?
Kaiser: It is simply a matter of time until the legal framework has been consolidated, the general conditions have been more clearly defined and the exuberance has subsided.
Is an ICO an alternative to crowdfunding?
Kaiser: From a legal standpoint, the answer to this is no; however, when you look at the facts, it clearly is. The balancing act of a compliant ICO lies in its ability to overcome the sometimes significant obstacles in the areas of third-party financing, crowdfunding and the protection of investors and consumers.
There have been ICOs with totals in excess of USD 200 million. How reputable are these companies?
Kaiser: There is indeed a handful of projects with proceeds in excess of USD 100 million. Some of these have legal advisors from the best law firms and possess highly complex, yet legitimate documentation and equally complex structures. Others, such as the DAO to cite the most recent example, are not just lacking in legal background; they also lack technical understanding. The rest are somewhere in between.
Is there a bubble in token prices?
Kaiser: Yes. There absolutely is.
And what does the future hold for ICOs?
Kaiser: Stable and probably a bit more boring than at present. I don’t think there is any turning back now.
Nathan Kaiser is a founding partner of the Eiger law firm, which has its registered offices in Shanghai and Taipei and is currently a research fellow at Harvard University in Boston. Having spent two decades in China, the Swiss lawyer moved to Boston in 2017 in order to conduct research into the legal issues surrounding technological phenomena such as fintech, AI and Blockchain. Alongside his activities as a lawyer and researcher, Nathan performs duties on numerous management boards and boards of directors. For example, he supported the Zurich-based consulting firm, xUpery, through its digital transformation and also acted as a founding member of the venture company, Space Angels, which promotes start-ups in the aerospace industry across the globe.
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