All Financial Wisdom
Cryptocurrencies as a Financing Mechanism for Companies
Currently, companies claim to be able to raise large amounts of money to finance their projects in days or hours from anywhere in the world. Little by little, aspiration is becoming a reality thanks to the explosion of blockchain.
The Blockchain seemed like a phenomenon that initially seemed reserved to certain experts, but has now attracted the interest of companies of all kinds of class, as well as professional investors and retailers, through the initial offers of cryptocurrencies (Initial Coin Offering, or better known as ICOs).
So we ask ourselves: According to the different regulatory bodies how can we operate with ICOs and tokens?
ICOs have already raised $4.6 billion
ICOs consist of the issuance by the applicant of the financing of a certain digital asset, called tokens, in exchange for official fiat currecy, that is, euros, yuan, dollars, or cryptocurrencies such as bitcoin that investors contribute to buy said tokens.
This new form of financing has attracted up to now 4,6 billion US dollars, through some 430 ICOs, according to the “Crypto Valley Association of Switzerland”, and is already channeling money to blockchain projects of the invested by venture funds traditional capital.
The popularization of this type of financing of the ICOs has attracted the attention of regulators due to its potential to bring together funds from different users, its character to break the national barriers and its characteristics that are not included in the current national legal regulations.
The SEC wants to regulate this type of business financing
The first regulator to try to normalize it has been the SEC, which has reached the conclusion that the issued tokens must be considered as securities (negotiable securities), applying Howeys’s Test.
In the context of blockchain tokens, Howey’s test can be expressed as three independent elements:
- An investment of money.
- In a common company.
- With an expectation of profits predominantly from the efforts of others.
The three elements must be met for a token to be a value. The third element covers both the third and the fourth tips of the traditional Howey test.
If you intend to raise large amounts of investor capital, which is what ICO is about, you must sell a value to do so.
To create a utility token in the United States, a fixed price must be established (it can be free or say 1 US dollar). Then nobody would buy it as an investment, they would only buy it for its value as a device that provides the function.
This is an excellent way to get money from people who need it, but totally useless to raise large amounts of capital, which is the starting point for the SEC to want to regulate.
At European level ESMA ,has made 2 statements about this type of business financing
In Europe, there are 2 statements issued by the European Markets and Securities Authority (ESMA) in November last year.
In the first declaration, ESMA establishes that, in the cases in which currencies or tokens qualify as financial instruments, it is probable that they are offering negotiable securities and carrying out regulated activities of placement, negotiation or advice on financial instruments or management or marketing of collective investment entities.
A negotiable value is the right of patrimonial content, which, due to its own legal configuration and transmission regime, is susceptible to generalized and impersonal traffic in a financial market.
In the particular case of utility tokens, if they are offered by setting the expectation of the buyer obtaining a benefit as a result of revaluation associated with the instrument or mentioning its liquidity or possibility of trading in markets similar to those regulated securities markets.
It is positive that regulatory bodies have established their respective positions on ICOs and recognizes the benefits that the technological development of financial services can bring, and shows willingness to apply the principle of proportionality to its supervisory functions.
Until there is sweeping and standard regulation across borders, ICOs should be analyzed individually with an open and proactive attitude by national regulators. Happy investing.