2019 Volume 22 Issue 1

Capital Raises, Initial Coin Offerings, and Token Sales

Capital Raises, Initial Coin Offerings, and Token Sales

From Traditional Placements to Crypto Offerings

Since the 1930s, corporate capital raising has remained substantially unchanged, with only two main options available: private placements and public offerings. However, recently with the introduction of crowdfunding and cryptocurrencies, the traditional paradigm has been dislocated like never before during the last 80 years. In this article we examine the impact of the financial innovation brought forward by the blockchain technology, through Initial Coin Offerings (ICOs) and Security Token Offerings (STOs). To support startups and new ventures in the digital space, ICOs and STOs have the potential to streamline, decentralize, and disintermediate the capital raising process, creating advantages for both entrepreneurs and investors.

Since the large-scale introduction of ICOs, the enticing features of these innovation have attracted a substantial interest from investors, issuers, and financial intermediaries. Lack of liquidity, fraud and regulatory issues, however, have created setbacks and negative publicity. As more regulation is expected to be introduced in the near future to ensure sufficient investor protection, it transpires that the sustainability and attractiveness of these new instruments will have to be tested by capital markets in the long run.

Traditional Ways of Raising Capital

Traditional corporate financing can be accomplished either via private markets or public offerings. The former is through private placements that are typically targeted to private equity funds, venture capitalists, hedge funds, family offices, and other institutional investors. These offerings are regulated by the Securities Act under Regulation D.[1] Private placements entail less compliance and lower transaction costs than public offerings due to registration exemptions and the fact that these securities are not listed on market exchanges, and therefore require less disclosure and compliance. Since these types of offerings are not subject to the examination and approval of the SEC, for the protection of “retail investors” only “accredited investors” can purchase these types of securities.[2] Private placements remain a popular way of issuing securities, and very renowned corporations such as Facebook, Uber, and Lyft among others, have made use of it in order to raise large amounts of capital in anticipation of going public.

In public offerings, shares of the issuer are sold on regulated stock exchanges to both institutional and retail investors. Going public is characterized by more rigorous tempo, procedures, and regulation, including mandatory filings with the SEC and listing authorities (i.e. NYSE, NASDAQ, OTC, etc.). Securities are automatically marketable and can be bought and sold in secondary markets by any type of investor.[3] The process requires registration with the SEC and its ultimate approval.[4]

Recently, the Jobs Act has introduced an innovative financing option called Regulation A+.[5] Rooted in the concept of crowdfunding, Regulation A+ allows companies to raise up to $20 million (Tier 1 offering) or $50 million (Tier 2 offering) in a 12-month period through “public solicitation” of shares and have the offering be exempt from SEC and state securities registration requirements.[6] Before submitting the offering memorandum to the SEC, it is possible to “test the waters” in order to assess the marketability of the offering and gather potential interest from investors early on in the process. Regulation A+ benefits from a streamlined and expedited review process, where the issuer is required to make its offering memorandum public just 21 days before the SEC qualification and the beginning of the “roadshow.”[7]

Issuers of Tier 2 Regulation A+ have the option of requesting a listing on market exchanges such as the NYSE, NASDAQ, or OTC. If they are approved, they can de facto complete a “mini-Initial Public Offering (IPO),” therefore combining public funding (through Regulation A+) with a stock listing.[8]

Blockchain, Cryptocurrencies and Tokens

The innovation that was brought forward by the so called “fintech” and blockchain technology has led to the introduction of new and unconventional financial instruments.[9] Blockchain refers to one type of distributed ledger, that is, a ledger of digital records or transactions that is accessible to all computers running the same protocol within the same network. This had an impact on the ways securities are issued in the marketplace, with the potential of greatly transforming primary capital markets. Some observers have even argued that due to its applications to financial markets, blockchain technology is as groundbreaking as the invention of double-entry bookkeeping in fourteenth-century Italy.[10]

Chart 1. How a Blockchain Technology transaction works.

Types of transactions include cryptocurrency, contracts, records, or other information.

Distributed ledgers eliminate the need of a central authority or financial intermediary for processing, validating, or authenticating transactions. Each record is time and date stamped and equipped with a unique cryptographic signature, which is designed to ensure the ledger’s authenticity and integrity. All participants view the whole ledger with its complete history that is verifiable and auditable. The cryptographic technology allows to both compress data and maintain confidentiality of the content and participants in each transaction. Only participants within the network and with the correct “key” can access the details associated with a specific record.[11] The combination of decentralization, verifiability, and transparency is what makes this technology so innovative and exciting for market operators. Distributed ledger as a technology has the potential for multiple uses in a wide array of industries, and cryptocurrencies are simply one aspect of the use of blockchains. As an example, the Bitcoin protocol results in each transaction being given a unique cryptographic number or “hash” and included with others in a “block” of similar transactions. Each completed block is also “hashed” in sequence with others to form a chronological blockchain.[12]  Other types of ledgers are based on different techniques, but yield similar results.

Bitcoin is considered to be a “single purpose” blockchain. Its objective is limited to the creation of Bitcoins. Ethereum is another example of distributed ledger technology, distinct from Bitcoin and represents an application of blockchain technology; namely, it provides the ability to create “smart contracts” on the distributed ledger. These smart contracts allow the issuance of separate digital tokens to the sponsor in exchange for Ether, other cryptocurrencies, or fiat money. More than 350 smart contract-based cryptocurrencies utilize Ethereum. These cryptocurrencies are the digital tokens that are typically offered in ICOs or STOs.

Chart 2: How smart Contracts Work.


Digital tokens can have equity or debt features, alone or in combination. Equity tokens similar to equity shares, allow investors to earn “dividends” and give the right to vote on major company proposals. Debt tokens are equivalent to short-term loans with an interest rate paid on the principal amount loaned to the issuer. Finally, utility tokens represent a prepayment for the right to use services on a platform (e.g. watching movies, listening to music, buying products, etc.) and therefore have consumptive or redemptive qualities and do not give ownership in the issuing firm.

Blockchain Technology gives internet users the ability to create value and authenticate digital information. This has led to new business applications in different industries as illustrated in the table below.[13]

Table 1: Business applications of Blockchain technology

Initial Coin Offerings

An ICO is an innovative method of financing corporations by which funds are raised for a new venture based on the blockchain technology. Through an ICO, an issuer offers a stock of specialized crypto tokens for sale, with the promise that these tokens will operate as the medium of exchange when accessing services on a digital platform as developed by the venture. Following the model of IPOs, coin offerings provide a source of capital for startups in the blockchain space for the initial development of digital platforms, although, no commitment is made as to the price of future services in tokens, or otherwise.[15] In an ICO campaign, a percentage of the virtual tokens is sold to early investors in exchange for fiat money or other cryptocurrencies (mostly Bitcoin). The initial step is for the issuer to publish a white paper that presents details on the project (that will be implemented upon the completion of the offering), such as the amount of capital to be raised, the percentage of the virtual tokens the founders of the project will keep for themselves, the type of currency that is accepted in the offering, and the duration of the ICO campaign.

At the beginning of the ICO buzz, offerings used to be conducted via crowdfunding. This method has significantly declined and has been replaced by private offerings mostly because Crowdfunding Regulation permits a company to raise a maximum aggregate amount of only $1,070,000 in a 12-month period.

ICOs tend to be less equity-dilutive for the issuers, since they do not automatically entail ownerships rights. Under ideal conditions, ICOs can also create a competitive dynamic for the offering of the token, while providing the issuer with useful market information and an estimate of what consumers are willing to pay for the proposed services.[16]

On the other hand, from the investor’s perspective, ICOs give access to innovative opportunities in technology that are not usually available through traditional equity investments.

Another potential advantage of ICOs is liquidity. In fact, under certain conditions, investors can sometimes trade tokens in secondary markets rather than having their value locked in the coin/security for several months and sometimes years like for private placements.[17] A secondary market also means that investors can monitor real-time prices based on the company’s progress, bringing more transparency into markets that can otherwise be quite opaque.

Overall, capital markets have enthusiastically welcomed the innovation brought by ICOs. In 2018, blockchain startups have raised more than $7.5 billion through ICOs.[18] In the first three quarters of the same year, approximately $3.9 billion were invested by venture capitalists in the blockchain space.[19]

Table 2: Top 5 ICOs in 2018

Despite the popularity of these new types of securities, ICOs remain relatively illiquid and their regulatory framework somewhat ambiguous. This casts doubts on the viability and successful future development of these markets.[20] Regulatory uncertainty in the U.S. has encouraged many entrepreneurs to move their companies overseas to Switzerland and Singapore, where there is more regulatory clarity for these types of offerings. After an offering, even tokens are traded on exchanges may display a very low degree of transparency. The company’s founders may in fact sell their tokens if they believe the future of the venture is somewhat grim without any specific disclosures; this at the great disadvantage of external unaware investors who may see the price of their tokens suddenly tumble. ICOs seem also to experience higher failure rates post placement and face a greater risk of fraud compared to other offerings.[21]

Regulatory Considerations

Since ICOs and Token offerings have only recently become part of the financial landscape, regulatory aspects play a very important role when structuring the transaction. Price volatility is also a concern.[22] This has led to increased scrutiny from the SEC, which is now more actively investigating ICOs and the investment vehicles that focus on cryptocurrencies or ICOs.[23]

While the SEC has expressed its appreciation for blockchain technology, following several warnings that many ICOs may be violating securities laws, it has recently issued subpoenas and information requests with regard to specific offerings.[24] In 2018, some of the targeted companies included AirFox, Paragon, Crypto Asset Management, TokenLot, and EtherDelta.[25] In this respect, the SEC has focused mainly on two important questions: can a digital asset be considered a “security” as defined by federal securities laws? If the answer is yes, which registration requirements apply?[26] In the past, issuers and advisors have often used the concept of “utility tokens” in order to avoid any regulatory burden.  In reality, regulators have clearly indicated that ICOs for “utility coins” or “voucher-like tokens” cannot necessarily avoid securities regulation. For this purpose, now the SEC applies the U.S. Supreme Court’s Howey test to ICOs to determine whether tokens constitute an “investment contract” (and thus are similar to an investment security).[27] According to the Howey test, a transaction is an “investment contract” if all of the following features exist:

  • there is an investment of money,
  • in a common enterprise,
  • with a reasonable expectation of profits,
  • to be derived from the entrepreneurial or managerial efforts of others.


One of the most important characteristics of ICOs and STOs include the ability to raise capital for blockchain startups in a relatively simple framework compared to traditional public offerings. These offerings also allow issuers to maintain control on new ventures, while taking advantage of competitive price dynamics that are typically available only to publicly traded companies. For investors, advantages include easier and earlier access to innovative technology and potentially more liquidity and price transparency than for private placements. Given their positive features, it appears that in the medium run, ICOs/STOs could represent a viable alternative to raising capital for many innovative startups.

Despite an auspicious beginning, the limited liquidity of recent ICOs coupled with SEC interventions and episodes of negative publicity can represent a challenge for issuers and investors alike. Clearly, these instruments still need to be tested by capital markets in order to understand their attractiveness to investors and whether the reduced level of scrutiny by regulators is sufficiently protective of investors. Time and experience will tell us whether crypto investments can increase their appeal to larger audiences and become a more reputable investment tool.

Additional References

Abadi, Joseph and Markus Brunnermeier,. “Blockchain economics”, Princeton University, mimeo. (May 1, 2018)

Catalini, Christian and Joshua Gans. “Initial Coin Offerings and the Value of Crypto Tokens”. MIT Sloan School Working Paper 5347-18, (March 9, 2018).

Clayton, Jay. “Statement on Cryptocurrencies and Initial Coin Offerings.” U.S. Securities and Exchange Commission, (December 11, 2017). https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11

ICOdata.io. “Funds raised in 2018.” Accessed January 5, 2019. https://www.icodata.io/stats/2018.

Johansen, Stefan K. “A comprehensive literature review on the Blockchain as a technological enabler for innovation” Mannheim University, Department of Information System, (November 2016).

Klein, Benjamin, Deborah R. Meshulam, and Jason Chang, “Crypto industry sweep: ICOs and token offerings under increasing scrutiny by US regulators” Securities Enforcement Alert, DLA Piper, (April 18, 2018). https://www.dlapiper.com/en/us/insights/publications/2018/04/crypto-industry-sweep-icos-and-token-offerings-under-increasing-scrutiny-by-us-regulators/

McLean, Sue and Simon Deane-Johns. “Demystifying Blockchain and Distributed Ledger Technology – Hype or Hero?, Morrison & Foster Client Alert, (April 5, 2016). https://media2.mofo.com/documents/160405blockchain.pdf.

NYSE, “Regulation A+ (Reg A+).” Accessed December 1, 2018. https://www.nyse.com/regulation-a

Rinearson, Judith, Ed Dartley, Jos Evans, David Harris. “ICOs – The Hottest Thing in FinTech and a Trap for the Unwary.” K&L Gates LLP, (December 13, 2017). http://www.klgates.com/files/Uploads/Documents/2017_IM_Conf/London/SessionIX.pdf

Rosic, Ameer: “What is Blockchain Technology? A Step-by-Step Guide For Beginners”. Blockgeeks.com https://blockgeeks.com/guides/what-is-blockchain-technology/

Roettgers, Janko: “Blockchain for Blockbusters: From Movies to VR Distribution Platforms, Media Is Embracing Decentralization” Variety (March 20, 2018) https://variety.com/2018/digital/news/blockchain-media-biz-1202729303/

SEC. “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO.” (July 25, 2017). https://www.sec.gov/litigation/investreport/34-81207.pdf.

SEC Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets. “Statement on Digital Asset Securities Issuance and Trading.” (November 16, 2018). https://www.sec.gov/news/public-statement/digital-asset-securites-issuuance-and-trading.

SEC v. W.J. Howey Co. 328 U.S. 293, 301, 1946.

U.S. Securities Act of 1933, Section 2(a)(1)

U.S. Securities Exchange Act of 1934, Section 3(a)(1)

Vereckey, Betsy:  “The pros and cons of ICOs for entrepreneurs”. MIT Management Sloan School, (April 12, 2018) http://mitsloan.mit.edu/ideas-made-to-matter/pros-and-cons-icos-entrepreneurs



[1] The U.S. Securities Act of 1933 was the first major federal legislation to regulate the offer and sale of financial securities.

[2] The assumption is that accredited investors are sophisticated enough to assess the risks inherent with private placements and therefore have the ability to evaluate investment opportunity on their own.

[3] Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price; if a security is liquid, this significantly lowers the risk for the investor.

[4] The tradeoff of retail investors protection by regulators is that by the time a corporation goes through an public offering, a large amount of value has been extracted by sophisticated investors that were able to participate in the early financing rounds of the company. This will be discussed further with reference to advantages of ICOs.

[5] “Title IV,” Jumpstart Our Business (JOBS) Act, 2012.

[6] Under Tier 1, the maximum amount of $20 million is permitted in a one-year period; the issuer must file an offering circular with the SEC, and will be examined by the commission and local state securities regulators. Companies under tier 1 do not have to publish reports continually; but are required to produce a report on the final status of the offering. Under Tier 2, companies can offer up to $50 million in a one-year period. An offering circular is required and is subject to review by the SEC, but not by state securities regulators. Additional requirements apply to Tier 2 offerings, including limitations on the amount of money a non-accredited investor may invest in a Tier 2 offering, requirements for audited financial statements and the filing of ongoing reports.

[7] During a roadshow, the management team of the issuer gives presentations to financial analysts, fund managers, and potential investors, travelling domestically and sometimes internationally for the purpose of creating awareness for the offering.

[8] “Regulation A+ (Reg A+),” NYSE, accessed December 1, 2018, https://www.nyse.com/regulation-a.

[9] The term Fintech is short for financial technology and commonly used to describe any new technology that seeks to improve and automate the delivery and use of financial services or financial research.

[10] Joseph Abadi and Markus Brunnermeier, “Blockchain economics”, Princeton University, mimeo (May 1, 2018).

[11] This process is referred to as “mining” Bitcoins. See Sue McLean Simon and Deane-Johns, “Demystifying Blockchain and Distributed Ledger Technology – Hype or Hero?,” Morrison & Foster Client Alert (April 5, 2016) https://media2.mofo.com/documents/160405blockchain.pdf.

[12] McLean and Deane-Johns, “Demystifying Blockchain.”

[13] Ameer Rosic: What is Blockchain Technology? A Step-by-Step Guide for Beginners; Blockgeeks.com (Upd. March 01 2019) https://blockgeeks.com/guides/what-is-blockchain-technology/.

[14] Janko Roettgers: Blockchain for Blockbusters: From Movies to VR Distribution Platforms, Media Is Embracing Decentralization. Variety. https://variety.com/2018/digital/news/blockchain-media-biz-1202729303/ (March 20, 2018).

[15] Christian Catalini and Joshua S. Gans, “Initial Coin Offerings and the Value of Crypto Tokens,” MIT Sloan School Working Paper 5347-18 (March 9 2018).

[16] Christian Catalini and Joshua S. Gans, “Initial Coin Offerings and the Value of Crypto Tokens”.

[17] Jamie Burke, “ICO Pros & Cons: Cutting Through The Hype” Outlier Ventures (April 16, 2017). https://medium.com/outlier-ventures-io/ico-pros-cons-cutting-through-the-hype-d4b58cbd77a8.

[18] “Funds raised in 2018,” ICOdata.io, Accessed January 5, 2019. https://www.icodata.io/stats/2018.

[19] Source: Pitchbook.

[20] Betsy Vereckey, “The pros and cons of ICOs for entrepreneurs”. MIT Management Sloan School, (April 12, 2018) http://mitsloan.mit.edu/ideas-made-to-matter/pros-and-cons-icos-entrepreneurs.

[21]Prosecutors have charged Maksim Zaslavskiy in the first fraud prosecution involving initial coin offerings. He has pleaded guilty to lying to about 1,000 investors and admitted to participating in raising money for two ICOs backed by investments in real estate and diamonds that didn’t actually exist; he faces up to 37 months in prison for conspiracy to commit securities fraud (https://www.pymnts.com/legal/2018/securities-fraud-ico-scam-guilty-plea/).

[22] During the last months of 2017, Bitcoin experienced a phenomenal rally increasing in value by nearly 2,000 percent, to a value of more than $19,000; however, since late December 2017, the price has fallen significantly. Approximately 60% of the value of Bitcoin was lost between December and February 2018, including a one-day drop of a staggering 25%.

[23] Internationally, regulators have also expressed concerns. For example, the UK Financial Conduct Authority has warned that ICOs are very risky and speculative investments, and often offer no protections for investors, with possibilities of fraud. The European Securities and Markets Authority (ESMA) notes high risks associated with ICOs and the risk that investors may lose all of their investments.

[24] Benjamin Klein, Deborah R. Meshulam, and Jason Chang, “Crypto industry sweep: ICOs and token offerings under increasing scrutiny by US regulators” Securities Enforcement Alert, DLA Piper, (April 18, 2018). https://www.dlapiper.com/en/us/insights/publications/2018/04/crypto-industry-sweep-icos-and-token-offerings-under-increasing-scrutiny-by-us-regulators/.

[25] SEC Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets, “Statement on Digital Asset Securities Issuance and Trading” (November 16, 2018).  https://www.sec.gov/news/public-statement/digital-asset-securites-issuuance-and-trading.

[26] On July 27, 2017, the Commission issued a report, which concluded that particular digital assets were securities and explained that issuers of digital asset securities must register offers and sales of such securities unless a valid exemption applies. SEC, “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” (July 25, 2017). https://www.sec.gov/litigation/investreport/34-81207.pdf.   See also, SEC Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets, “Statement on Digital Asset Securities.”

[27] SEC v. W.J. Howey Co., 328 U.S. 293, 301, 1946. For investment securities, see Section 2(a)(1) of the U.S. Securities Act of 1933 and Section 3(a)(1) of the U.S. Securities Exchange Act of 1934.

Print Friendly, PDF & Email
Authors of the article
Paolo Casarella
Paolo Casarella
Prior to joining Bardi Co. LLC as a principal, Mr. Casarella has worked with Arner Bank in Switzerland, where he was in charge of business development for Asia. Before that, he worked in the Equity Capital Markets team at Capitalia's Investment Banking (currently Unicredit, one of Europe's largest lenders) working with major listed companies such as Pirelli, FIAT (currently FCA), Telecom Italia, Autostrade (Atlantia), and others on IPOs, rights issues, convertible / exchangeable offerings and real estate fund offerings. He began his career in 1999 at Dresdner Kleinwort Wasserstein's in the investment banking department, where he was part of the team advising on the Enel IPO (Eur 16 billion) and other IPO and M&A mandates (services, FIG). Mr. Casarella completed an internship at the European office of the World Bank in Paris and graduated from Bocconi University (Milan) in economics.
Chris Manfrè, PhD, MA, MBA
Chris Manfrè, PhD, MA, MBA
Dr. Manfrè’s experience includes serving as a financial advisor and strategic consultant to both domestic and international corporations as related to merger, acquisition, divestiture, joint venture, corporate restructuring, financing transactions and business valuation. Before joining Pepperdine University, Dr. Manfrè was a visiting assistant professor at Loyola Marymount University with the economics department. He began his financial services career with Standard & Poor’s in Los Angeles. Prior to his career in finance, Dr. Manfrè served as an active duty military officer of the Alpine Troops in the Italian Army, where he had the opportunity to participate in various NATO operations in the Balkans. Dr. Manfrè holds a Laurea Magistralis from Università di Firenze, in Florence, Italy (MA equivalent), an MBA in finance from the Drucker School of Management, an MA in economics from Claremont University and a PhD in financial economics also from Claremont Graduate University. He holds the Series 24, 28, 7, 79, and 63 FINRA Licenses. His research interest lies primarily in the areas of behavioral finance, international finance and M&A.
More articles from 2019 Volume 22 Issue 1
Related Articles