Nowadays, companies have claims to be able to raise large amounts of money in order to finance their projects in days or hours from anywhere in the world. Little by little, this aspiration is becoming a reality thanks to the irruption of the blockchain into our lives. Kimberly Rosales, an expert in the world of cryptocurrencies, explains how companies’ projects can be financed through these digital currencies.
Blockchain is a phenomenon that at first seemed reserved for certain experts but has now attracted the interest of companies of all kinds, as well as professional and retail investors, through Initial Coin Offering (ICO) cryptocurrency offerings. ICOs consist of the issuance by the applicant for the financing of a given digital asset, called tokens, in exchange for official tender, like euros or US dollars, or cryptocurrencies such as Bitcoin (BTC) that investors contribute to buy these tokens.
This new form of financing has so far raised $4.6 billion through some 430 ICOs, according to the Swiss Crypto Valley Association. It is already recapturing and channeling money to blockchain projects from that invested by traditional venture capital funds. “The popularization of this type of ICO financing has caught the attention of regulators because of its potential to bring together funds from different users, its ability to break national barriers, and its characteristics that are not included in current national legal regulations,” says Rosales.
The Securities and Exchange Commission (SEC) is the first regulator to want to get involved in regulating this type of company financing. To this end, it has analyzed the issuance of “The DAO” to reach the conclusion that the tokens issued should be considered securities by applying the ‘Howey Test.’
The Howey test in blockchain tokens can be described as three distinct elements. First, money investment, second in a common enterprise and third, expectation of profit primarily from the efforts made by others. To be considered a security token, all three must be met. The third element includes both the third and fourth prongs in the traditional Howey test.
If you intend to raise large amounts of capital from investors, which is what ICOs are all about, to do so, you must sell security. To create a utility token in the US, you must set a fixed price (it can be free or, for example, $1). Then no one would buy it as an investment, they would only buy it for its value as a device that provides the function.
This is a great way to raise money from people who need them, but totally useless for raising large amounts of capital, which is the starting point for the SEC wanting to regulate it. Rosales considers that ICOs are factors that determine this assimilation to business securities the fact that the tokens attribute rights or expectations of participation in the revaluation or profitability of businesses.
Rosales notes, “Although blockchain was originally only used to create the new digital currencies, it can also be used for other tasks. It can be used for cloud computing without losing information, copyright management, unforgeable information storage, and many other uses. Blockchain technology allows data to be stored and modified in a secure, verifiable manner. Many businesses are able to adapt to it.”
To avoid confusion with the new currency, a token is a currency that can be used to support blockchain technology. An ICO is a way to fund the project and exchange these tokens for money. Tokens can be used in the project to pay for certain services.