Well of course, Captain Obvious! Which is why we think registered STOs are necessary soon.
by Risen Jayaseelan of Crypto News Asia
One of the fundamental differences between initial coin offerings (ICOs) and initial public offerings (IPOs) is the governance standards on the usage of funds raised. In the ‘wild west’ of the cryptoworld today, there are no standardised rules that govern how projects use the funds they raise.
Instead, white papers disclose the project owners’ plans for the usage of proceeds and typically, a seemingly credible board runs a foundation that collects the proceeds which then disburses the monies towards their dream blockchain project.
In IPOs, companies need to disclose how they plan to use their listing proceeds and report usage updates on a quarterly basis. Their accounts are also subject to both internal and external auditors.
Despite those rules, there have been instances where public companies still manage to spend money excessively on things that do not go towards building their business. There have also been cases of criminal breach of trust.
However, public companies face activist shareholders who can raise questions at mandated general meetings for example. Breaking criminal laws entitle regulators to step in.
With ICOs, there are less of such avenues.
Vinny Lingham, a well known crypto personality, raised the prospect of ICO projects spending going awry with a recent tongue-in-cheek tweet that said he has been hearing about teams splurging their ICO proceeds on private jets, drugs and non-stop partying.
Another related concern is that a high number of ICO projects were cashing out the Ether they had raised. A Bloomberg report two weeks ago highlighted this concern and said it was one reason why Ether prices are falling. Another report said that over 50 ICO projects sold 125,000 Ether in the past one month alone.
The question is, how are these millions of dollars being used by the project owners? How are they being held accountable for that spending?
The lack of governance has not stopped many crypto investors though. They reckon that project owners have their reputation at stake and hence, are inclined to self-govern the usage of their funds for their blockchain-based projects.
Investing in technology companies had previously been the domain of venture capitalists. As we know, the dawn of ICOs has been seen as a revolution in disrupting that. Meaning, now average investors get a chance to get in early on a tech company, similar to how VCs make very high returns on their early bets.
However, one big difference is that VCs are apt at putting in stringent terms into their investment deals with entrepreneurs. They typically include strict milestones that relate to the disbursements of more funds. In some cases, entrepreneurs are also personally held liable for losses or mismanagement of funds.
Hence, it is understandable why project owners in the blockchain space, would prefer raising funds via the ICO route. But are investors sufficiently protected?
The good news is that there are a number of initiatives being planned to ensure better governance standards are in place for token sales.
For example, in a recent consultation paper for ICO rules, the Philippines SEC (Security and Exchange Commission) is suggesting a rule that requires projects to provide a brief description of the use of proceeds from the token sale.
The SEC goes a step further to say that the ICO projects cannot deviate from the planned use of proceeds, unless there is proper notice, approval and disclosure.
Other self-regulatory bodies have also put up standards for whitepapers. However these bodies have no means of enforcement.
It is for these reasons that many regulators regard ICOs simply as-non compliant securities.
This situation paves the way for the dawn of security token offerings or STOs.
Edmund Yong, co-founder of Celebrus Advisory, a blockchain consulting firm, explains: “If the token construct is based on utility, which most ICOs go to great lengths to do, then there is really not much recourse (for investors). The whitepaper is not a prospectus. The token has no rights or obligations attached to it and the management is not governed by any code of conduct. The investors have no choice but to do their own due diligence. This is why security tokens will become much more important in the future because one cannot bridge the trust deficit with a utility proposition.”