The term “ICOs” – initial coin offering – has become increasingly noticeable in the financial news during 2017. In short, an ICO is a new way of raising funds from the public. Businesses raising funds through an ICO, are often technology companies, whose business models are based on the use of new technology such as blockchain etc.
How does an ICO work?
The term ICO covers the offering of a business’s own coin (cryptocurrency) to the public, on a blockchain. The abilities of such a cryptocurrency vary im- mensely. A cryptocurrency, with abilities aside from simply being a currency, is called a token. A token could represent ownership of a company, a prepay- ment voucher for a company’s future services or something entirely different.
As such, an ICO is always an offering of cryptocurrency. In those cases where the offered cryptocurrency has additional specific abilities, it is a token.
Are ICOs regulated by the Danish FSA?
Cryptocurrencies that are only usable as a means of payment, remain unreg- ulated in the financial legislation in Denmark. However, certain tokens in- creasingly resemble financial instruments, which could potentially cause them to fall within the scope of the regulation. Whether this is the case, will always depend on a case by case assessment.
It is important to note that even though an offered token is not a financial instrument, the way an ICO is structured, or the way investments in them take place, can still be regulated activities.
Businesses involved with ICOs and cryptocurrencies in general should care- fully consider, if their activities fall within the scope of the financial regulation.
For example, the Prospectus Directive, the Alternative Investment Fund Man- agers Directive, the Fourth Anti-Money Laudering Directive and more could be relevant.
Whether an ICO is regulated or not will always be subject to an individual assessment by the Danish FSA.
How does an ICO take place?
Businesses that wish to raise funds through an ICO, usually prepare a white paper (business plan), describing the products or services they wish to de- velop. The white paper also describes the abilities of the token, and often describes the capital requirements for realising the proposed product or ser- vice. An ICO often involves several rounds of coin offerings, where the price is set to increase for each subsequent round, the incentive being that the ear- lier people invest, the greater the discount.
Investors in ICOs have different motives for investing. Some invest hoping that the proposed products or services will become a reality, while others in- vest solely in the hope of an increase in the value of the token. In the latter, the investment is purely speculative.
An ICO often represents a cheap way of raising funds, as most ICOs will not fall within the scope of the regulation. This means that a business can start raising funds quickly, as there is no need for regulatory approval. Another advantage is that the business raise funds alongside building a client base ready to buy their future product or service. This rapid access to funding also contains significant pitfalls, which especially investors in ICOs should be aware of.
The following is an example of a possible ICO. ICO for the company ABC (example)
Company ABC wishes to develop an app through which they will offer cheap and secure storage to their customers. The business idea is to provide private consumers with a cheaper alternative to cloud storage. Utilising blockchain- technology, ABC’s app connects all devices running the app to a single net- work. Through this network, ABC enables users to trade storage space by facilitating the selling and buying of excess storage. E.g. if you have 20GB available storage on your smartphone, you can rent it out, or you can rent extra storage with ABC, in case you need it. All of this is made possible through the app’s network, and the use of blockchain-technology ensures that user A’s data is encrypted and secure even though it is stored on user B’s smartphone.
ABC require two main resources to achieve their goal; capital and users. To accomplish both, ABC choose to raise funds through an ICO. ABC thus offers a token (ABC-coin), which users can use to buy storage, in the event that ABC reaches their required capital. The incentive to invest in the ABC-coin is that the token is sold through an ICO-process at a reduced price, compared to what ABC expects to charge for the service in the future.
As an investor in ABC’s ICO, you can purchase the ABC-coin to get the future service at a discount, as well as in the hope of an increase in the value of the ABC-coin. Realisation of the potential increase in value will often require that trading is possible through a cryptocurrency exchange supporting the partic- ular coin.
Investing in ICOs
Investing in ICOs is a high-risk investment. Further, this investment is com- monly settled using another high-risk product, a well-known cryptocurrency such as bitcoin or ether. The Danish FSA strongly advise that you as con- sumer and investor make yourself aware of all the risks related to the invest- ment. Further, you should acquire the necessary understanding of the busi- ness model and the technology behind it, before investing. It is important to point out that there is a real risk that the value of the cryptocurrency or token will change rapidly, as they are high-risk investments. Thus, you could poten- tially lose your entire investment.
Below we have listed some of the main risks associated with investing in ICOs.
- No investor protection
Most ICOs do not fall within the scope of the financial legislation, as they do not offer financial instruments. Therefore, there are no investor- or consumer protection.
- Price
Just like cryptocurrencies (bitcoin or ether), tokens are subject to extreme changes in price.
• Inadequate documentation
As most ICOs are not regulated, they are often not subject to documentation requirements e.g. prospectuses in connection to issuance of securities. The only foundation of an ICO is a white paper, which has no formal- or disclosure requirements.
- Fraud
In several instances, the white paper behind an ICO has turned out to be false. This means that people have written white papers in order to take advantage of the attention or hype surrounding ICOs and the ensuing investment readi- ness, with no intention of realising the business plan described in the white paper.
- Liquidity risk
Investing in ICOs also involve the real risk of not being able to realise the investment – i.e. not being able to sell your tokens in order to receive fiat currency. In addition to the specific abilities of a token, the token itself is a cryptocurrency. Investors hope that the trust in a token will result in an in- crease in its value. In order to capitalise on the increase, an investor will nor- mally have to go through a cryptocurrency exchange. If trust in the particular token disappears, the market can completely disappear, rendering the token untradeable. This will leave investors with no opportunity to retrieve their ini- tially invested fiat currency.
Want to know more?
If you have any questions, the Danish FSA encourage you to contact us at
Please be advised that ICOs might be regulated under other regulation than the financial. This applies both if you are a potential investor or a business seeking to raise funds through an ICO. Examples could be; tax regulation, consumer protection laws or marketing laws.