Startups enticed by the growing popularity of initial coin offerings (ICO) as a fundraising method may soon be subject to more regulation, as the corporate watchdog prepares step up its oversight of the blockchain-based funding practice to weed out any scams.
However, one local startup founder who’s in the midst of his own ICO says more regulation is needed to ensure startups don’t expose themselves to unnecessary risk.
The Australian Securities and Investments Commission is poised to release a guiding statement on ICOs, reports Innovation Aus, which will likely see Australia follow the lead of the US by including the fundraising method within its existing regulations governing initial public offerings (IPOs).
The regulator is reportedly working with members of the startup community, including FinTech Australia, to develop guidelines, however, is believed to have the view that many of the “tokens” currently being issued through ICOs would fall within ASIC definitions of securities.
This news comes as China made the decision to ban the funding method last week, citing concerns over money laundering and economic disruption, according to TechCrunch.
To date, ICOs have given startups the capacity to spur huge raises in short periods of time — a feature that has made it attractive to startups with blockchain-based platforms that are looking to raise money fast.
Described by some as akin to “crowdfunding on steroids”, ICOs involve participants being issued share-like digital assets or “tokens”, which are then listed on online cyptocurrency exchanges. The tokens can then be traded for other cyptocurrencies, such as Bitcoin or Ethereum.
In June alone this year, Ethereum ICOs raised close to $1 billion through the blockchain-based cryptocurrency network, and Australian startups have been eager to get in on the action. Earlier this month, Perth-based energy startup Power Ledger raised $17 million in 72 hours through the pre-sale of its Ethereum ICO tokens.
ASIC’s proposed regulatory guidelines also come at a time when parliamentarians are looking to press the accelerator on blockchain technology. Last month, members from both sides of the aisle came together to form the Parliamentary Friends of the Blockchain group, led by Labor Senator Sam Dastyari and Liberal Senator Jane Hume.
A “grey mist of uncertainty”
Tim Lea is the founder of Veredictum, a Sydney-based blockchain startup looking to reduce rates of film piracy. He says he would welcome increased regulation of the sector after experiencing the regulatory challenges of his startup’s own ICO.
“It’s the real wild west out there,” Lea tells StartupSmart, referring to the lack of regulation in the blockchain network.
“When we looked at our token sale, we spent six months designing tokens with regulator risks in mind. We categorically didn’t want to be seen as being a security, so we designed everything to minimise that regulatory risk,” Lea says.
The issue of whether ICO “tokens” are classified as “securities” has been a hotly debated topic worldwide, and is causing a “major drama” globally, Lea says. He believes any ASIC-issued guidelines “need to define definitely whether ICOs are recognised as being securities or not”.
Lea says that for startups to conduct successful ICOs, they need to “know the rules they can play by” otherwise they expose themselves to unnecessary regulatory risk, which is why these proposed ASIC guidelines would be beneficial for startups in the sector.
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“It’s as if we are fumbling through this grey mist of uncertainty and trying to find the rails of regulation,” he says.
“We are trying to adopt industry best practices, but in the absence of structure, if we make an honest mistake how forgiving will regulators be?”
Lea’s own ICO was launched in early August and ends tonight. While it fell short of its $2.5 million goal, instead raising under $500,000, he still says the exercise worked “exceptionally well” from an global marketing perspective as it generated exposure and interest in the platform.
While Veredictum didn’t raise the amount it was hoping to, Lea says danger also lies at the opposite end of the spectrum when startups raise “extreme levels of finance”.
“There are companies that have raised $150 million through an ICO. If you’ve got too much money to play with it can lead to excesses, lack of discipline and lack of control,” he says.
“In the startup space 90% fail in general terms — I reckon that 97% of ICOs will fail,” he says.
Lea attributes this high rate of potential failure to the lack of venture capital influence in these startups, which means the founders lack crucial discipline, strategic advice and partnership opportunities from investors.
“It might take them [startups raising fund through ICOs] a bit longer because they’ve got a massive war chest, but they don’t have VCs or external forces imposing the discipline that a startup needs,” he says.
“VCs will fund ten [startups] out of every thousand, whereas we’ve got people from across the globe that are putting money in to ICOs that are inexperienced: as a result I just question how viable a lot of these businesses will be.”
StartupSmart contacted ASIC for comment but did not receive confirmation of these potential regulatory guidelines prior to publication.