Cryptocurrency, Initial Coin Offerings (ICOs)–While the crypto markets hit a relative low for the year, with Bitcoin now trading at $3300, the news continues to worsen for the controversial field of initial coin offerings.
ICOs, the innovative fundraising measure that has capitalized on the speed of growth in the space of cryptocurrency, have come under fire by the United States Securities and Exchange Commission over whether they should constitute securities. In November, the Commission announced a landmark ruling which could have broad implications for the landscape of the industry, when it determined that two startups companies were in violation of securities laws. Two projects in question, including Paragon, had managed to raise millions by issuing tokens to non-accredited investors, a breach in which the SEC found grounds for legal action.
Paragon has since announced that it would be forced to pay back investors, leading to a sense of uneasiness among other coin projects which could be facing a similar fate. Crypto hedge funds, which made substantial returns on investment by buying into initial coin offering projects during the bull run of 2017, could be looking at a possible scenario where invested projects are forced to pay back investors en masse, leading to a conundrum for the funds which backed their development.
As reported by Bloomberg, the situation surrounding ICOs is further complicated by the fact that many cryptocurrency projects failed to register with the SEC in addition to selling their tokens to individual investors who lacked the proper requirements for accreditation. While some have hailed the ICO, token-issuing model as one of the more innovative processes to emerge from the development cryptocurrency, others have seen a budding industry ripe with corruption. ICOs allow startup companies to fund and issue projects to investors at a rapid pace compared to the traditional route, including the ability to sell directly to Main Street investors rather than going through venture capitalists.
However, with the SEC ruling potentially being applied to a broader spectrum of currencies than the original two announced in November, hedge funds which supported ICO projects throughout 2017 and 2018 could be left holding the bill in the event of investor funds being returned. Pantera Capital Management, a fund heavily invested in cryptocurrency, is one company in particular that is reporting a shaky outlook following the SEC ruling.
In a newsletter released on December 13, Pantera’s co-chief investment officers Dan Morehead and Joey Krug explained that the SEC had broad implications for both their fund and the ICO marketplace, with one possible outcome being a stifling of innovation,
“While we believe the vast majority of the projects in our portfolio should not be affected, approximately 25 percent of our fund’s capital is invested in projects with liquid tokens that sold to U.S. investors without using regulation D or regulation S. If any of these projects are deemed to be securities, the SEC’s position could adversely affect them. Of these projects, about a third (approximately 10 percent of the portfolio) are live and functional and, while they could technically continue without further development, ending development would hinder their progress.”
While most regulatory bodies have been careful to tread lightly around emerging industries, with cryptocurrency being a possible source of innovation for the broader financial and tech landscape, ICOs have continued to be a source of contention for the SEC.