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Companies ignoring growing regulatory chorus on ICOs

In the month since the US's Securities and Exchange Commission published its report on the Decentralised Autonomous Organisation, a number of regulators around the world have chimed in to express similar opinions that they should regulate initial coin offerings. However, despite the gathering consensus, the flow of ICOs has yet to abate.

  • By Lewis McLellan
  • 31 Aug 2017
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Cryptocurrencies, tokens issued on a distributed ledger by a company, have provided tech start-ups with an unregulated means of raising capital. Companies simply design and market a run of tokens registered on a blockchain, then sell these to investors in an initial coin offering (ICO).

Companies are able to raise millions of dollars through this method, allowing them to forgo the more traditional methods of selling stock or going into debt. Estimates of the amount raised this year vary, but most put it between $1.3bn and $1.75bn. In June, the total raised by start-ups through ICOs outstripped the amount raised from venture capital firms.

Some have touted ICOs as a democratising influence on capital markets, lowering the barriers of entry to capital raising exercises. Rather than going through the expensive audit process involved in selling stock, or incurring the legal expenses of printing debt, all a company needs to hold an ICO is a white paper, outlining a business plan, and access to a blockchain.

However, without regulatory oversight, these low barriers to entry have resulted in a host of frivolous ICOs without viable business models, and a number of scams.

But the era of unregulated crypto-fundraising could soon be over. The SEC published a report in July in which it stated that tokens sold in an ICO in April 2016 were deemed to be securities under the Howey Test, and therefore under its purview. The Howey Test states that a transaction is deemed a security if it involves the investment of money in a common enterprise with the expectation of profit derived from the managerial effects of others.

This came as no surprise to lawyers and it was not long before other regulators voiced their support, prompting some to speculate that there is a degree of international cooperation between regulators.

During August, the Monetary Authority of Singapore and the Canadian Securities Administrators both made announcements aligning with the SEC’s determination that cryptocurrencies could be deemed securities.

The People’s Bank of China has also waded in, reportedly discussing a blanket ban on ICOs. The move prompted Red Pulse to ban Chinese citizens from its ICO scheduled for September 10.

The National Internet Finance Association of China also published a press release on Wednesday, warning investors of the risks of investing in ICOs, highlighting a “serious shortage of information disclosure [translated]”.

“The SEC’s report was a wake-up call to other regulators, and to the industry, letting them know that regulators are paying attentions,” said Charley Cooper, managing director at R3. “We’re only going to see more and more entities following suit.”

However, despite the fact that regulators are making their position increasingly clear on the matter, the cryptomarket has not slowed down. Coinschedule.com features well over 100 ICOs in progress or scheduled to start within a month, raising funds for a dizzying range of start-ups. It is, according to securities lawyers, likely that a large proportion of these fall foul of the Howey Test and would be deemed to be securities.

Only one ICO to GlobalCapital's knowledge has made an effort to comply with securities law. FileCoin was issued only to qualified investors in early August.

“A lot of tech folk are not used to working in such a regulated environment,” said Cooper. “Uber simply had a taxicab commission to contend with and was able to bend some rules without too much concern. Financial regulators have civil and criminal authorities. These ICOs are not flying under their radar. They may be grossly underestimating what they’re up against and should be getting proper outside counsel on how to comply with securities law.”

However, the SEC is yet to come down on any ICOs and, as a result, the market continues to proliferate.

“We need to see regulators act, not just make pronouncements,” said Cooper. “They need to write regulations and promulgate them to the market if it’s to make a difference.”

The SEC has taken some steps to crack down on one aspect of the market. It suspended trading in several public companies claiming to be related to or engaged in ICOs.

“These frauds include ‘pump-and-dump’ and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies,” says an SEC investor alert published on Tuesday.

  • By Lewis McLellan
  • 31 Aug 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 416,634.23 1594 9.03%
2 JPMorgan 379,647.36 1732 8.23%
3 Bank of America Merrill Lynch 359,625.73 1304 7.80%
4 Barclays 267,126.92 1079 5.79%
5 Goldman Sachs 267,110.09 921 5.79%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 45,314.03 193 6.64%
2 Deutsche Bank 37,536.19 138 5.50%
3 BNP Paribas 36,532.54 211 5.36%
4 JPMorgan 34,490.59 115 5.06%
5 Bank of America Merrill Lynch 33,700.87 110 4.94%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 22,398.41 104 8.66%
2 Morgan Stanley 19,092.40 102 7.38%
3 Citi 17,812.08 111 6.89%
4 UBS 17,693.89 71 6.84%
5 Goldman Sachs 17,256.05 98 6.67%