ACCOUNTANT_SUMMER18_AMENDED_PG12

INITIAL COIN OFFERINGS
ICOs –
a wealth of opportunities
DR JOSEPH F. BORG
DR JOSEPH F. BORG IS AN
ADVOCATE AND PARTNER AT
WH PARTNERS, HEADING THE
BLOCKCHAIN AND THE GAMING
AND GAMBLING ADVISORY
SECTIONS OF THE FIRM.
TESSA SCHEMBRI
TESSA SCHEMBRI IS A LEGAL
TRAINEE WHO FORMS PART OF
THE BLOCKCHAIN AND GAMING
AND GAMBLING ADVISORY TEAMS
AT WH PARTNERS.
I
nitial Coin Offerings (ICOs) are by-products
of the larger cryptocurrency phenomenon,
which began with the conception of Satoshi
Nakomoto’s Bitcoin back in 2009. With blockchain
technology on the rise, we are continuously seeing an
increase in start-up and mature companies pursuing
a novel path to raise capital: the so-called ICOs,
sometimes referred to as a ‘token generating events’
or simply ‘token sales.’
An ICO is an application which enables organisations of
any size to raise money, in a peer-to-peer manner akin
to crowdfunding, by offering cryptocurrency tokens in
a new venture, project or network. Developers draw
up a ‘whitepaper’ in which they outline their business
idea to potential buyers and then sell tokens to those
willing to contribute. Contributors participate in the
fundraising by transferring fiat currencies like the
euro, or cryptocurrencies like bitcoin and ether, to
the issuer in exchange for a token. The very first token
‘Maidsafe’ was launched via an ICO in 2013 on the
Mastercoin blockchain, but most ICO tokens which
followed were created through the deployment of
a smart contract built on top of an already existing
blockchain. Currently, the most popular blockchains
used for ICOs are the Ethereum, Waves NEO and the
new EOS platforms. The issuing company then designs
digital tokens that can grant any bundle of rights and
obligations for the token holders. When the rights
which stem from tokens embody rights to profits or
voting rights, the ICO may be likened to a traditional
Initial Public Offering (IPO).
The attractiveness of ICOs was spurred by the sudden
rise in the value of bitcoin and the strong expansion of
the overall cryptocurrency market, which resulted in a
widespread media coverage of the blockchain space.
The staggering increase in price which some tokens
experienced following their launch on secondary
market exchanges, continued to serve as an attraction
for businesses and investors with a risk appetite to
invest in these innovative technologies. Nevertheless,
the great decline in the value of the cryptocurrency
market since its high in December 2017, coupled with
the continuing increase in the number of ICOs currently
taking place, is clear evidence that the opportunities
of ICOs extends far beyond market speculation. As
ICOs provide a facility for leveraging cryptocurrencies
and smart contract technology, it has now become
possible to replace traditional venture capital and
other funding models with a more direct, automated,
and decentralised solution. As a result, blockchainbased
ventures have turned to ICOs as a mechanism for
funding, realising these are easier, faster and cheaper
than pursuing seed rounds through traditional venture
capital models. From a token purchaser’s perspective,
ICOs have also presented an opportunity of gaining
access to technology companies at their very early
stages; an opportunity which has traditionally been
limited to venture capitalists and accredited investors.
The turning point for ICOs occurred in July 2017, when
the United States Security and Exchange Commission
(SEC) issued an investigative report cautioning market
participants partaking in ICOs, that such activities are
subject to the requirements of the federal securities
laws. The SEC’s report was issued in response to the
tokens offered during ‘The DAO’ 1 ICO and which were
consequently held to qualify as securities that must
necessarily comply by US securities legislation. The
ramifications of this seminal decision led regulators
and policy-makers worldwide to issue similar warnings
and opinions on the legal requirements, future
enforcement actions and the potential dangers
pursuant to ICOs. Within the European Union, the
European Securities and Markets Authority (ESMA)
issued a statement stressing that firms involved in
ICOs qualifying as financial instruments, are carrying
out regulated activities and must comply with EU
investment services legislation such as the Prospectus
Directive, the Markets in Financial Instruments
Directive (MiFID II) and the now Fifth Anti-Money
Laundering Directive (5AMLD).
Malta was and is the first and only Member State
to go a leap further than just publishing warnings,
consultation documents and discussion papers. The
Maltese Government revealed its ambitious legislative
plan back in February 2018 when it proposed the
introduction of three pieces of legislation which would
regulate the Maltese blockchain ecosystem as a whole.
These are the Malta Digital Innovation Authority Act,
36 Summer 2018
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Decentralised Autonomous Organisation