Startups’ Cryptocurrency Fundraising Loophole Gets a Regulatory Reality Check

Cryptocurrency was invented by people who didn’t much like regulators, but red tape can still bind the technology that enables it, blockchains. Fresh proof comes from a pronouncement from the Securities and Exchange Commission late Tuesday. It said that regulations applying to investments such as stocks also apply to some initial coin offerings, a novel approach to fundraising that startups have used to draw in more than $1 billion this year.

Described simply, an ICO sounds like a childish money making scheme. A person, project, or company in need of capital creates a new kind of digital coin and sells a tranche of them for real money. Magic! The coins are created using the same kind of technology behind cryptocurrencies such as Bitcoin or Ethereum, and usually paid for using digital currency, not dollars.

ICO boosters describe them as a democratizing financial force that provides capital to projects unlikely to get it from established sources such as banks or venture capitalists. The SEC’s announcement means that some projects will now have to pay up for the lawyers, disclosures, and paperwork required to register with the SEC before they can solicit money from Americans.

That news was widely expected, but could cool a fever that even proponents of ICOs say risks leading people to stake money on poorly planned, or even outright fraudulent projects. “You had a mix of serious teams with good developers and track records and then a bunch of entrants looking for a get rich quick scheme,” says Christian Catalini, an MIT professor who has been studying ICOs, and considers them a valuable financial innovation. “I think the SEC is worried that many people don’t realize it’s like gambling; many or most of ICOs will go to zero.”

The Magic of Initial Coin Offerings

So why would you buy into one of these schemes? Often because the brand new coin, or token, you’re offered today is supposed to have some kind of utility or value tomorrow.

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