Initial Coin Offerings, or ICO’s, are a new and quickly growing way for startups to raise capital. Despite being a relatively new phenomenon the total value of ICO’s has been proliferating with nearly $1.5 billion dollars being raised since the start of the year. That value seems outlandish when compared to the mere $256 million of funding that was raised in the entirety of 2016.

While the value of ICO’s has grown nearly six-fold in the past year, many people are still in the dark regarding the new trend that is sweeping investors and startups across the globe. Essentially, ICO’s are a cross between more traditional IPO’s and crowdfunding. During and ICO a company issues “coins”, or digital tokens, similar to the popular cryptocurrencies bitcoin and Ethereum. Investors can then purchase these coins and conceivably can use them to purchase a good or service from the company at some point in the future. The value of these coins will theoretically increase in value, as long as others continue to invest. An important distinction between IPO’s and ICO’s is that investors in an ICO do not receive equity in the company and don’t really have anything tangible behind their investment besides a promise for the ability to be able to purchase a good or service from the company in the future. A second differentiator between traditional methods of raising capital and ICO’s is the amount of regulation. Given that the concept of an ICO is so new, the space is largely unregulated allowing companies to prepare for and launch in ICO in a matter of weeks as compared to the months it takes for companies to clear regulatory approval for IPO’s.

If it seems like ICO’s are highly risky, it’s because they are.  While statistics on ICO’s can be difficult to find, research firm Smith & Crown aggregated information on the ICO’s that have launched this year. Their findings stated that the offerings that have gained since their launch have increased by an average value of nearly 28 times. However, 10% of offerings have declined in value, by an average of 40%, and 30% of offerings haven’t even traded. There is also a security risk aspect to ICO’s. According to a report by Chainalysis, a firm specializing in monitoring cryptocurrency transactions, approximately 10%, totaling $150 million, of money invested in ICO’s this year using the cryptocurrency Ethereum has been stolen.

Regulators across the globe are aware of the immense risk, volatility, and lack of regulation inherent in ICO’s and are beginning to take action. In July, the United States Securities and Exchange Commission (SEC) warned that some ICO’s should be regulated as securities stating that “the definition of a security under the federal securities laws is broad, covering traditional notions … such as a stock or bond, as well as novel products or instruments where value may be represented and transferred in digital form.”

Regulatory officials in Singapore, a hotspot for new ICO’s, are also keeping a close eye on ICO’s after issuing a warning last month that ICO’s are potentially vulnerable to scams and terrorist financing.

China, a nation with one of the largest ICO markets with $395 million being raised this year alone, has taken the most drastic action of all. This Monday, The People’s Bank of China declared ICO’s to be illegal, calling for ICO action to “cease immediately”. Chinese authorities even went as far as to call for individuals and organizations to refund investors for any amounts raised via ICO.

The future for ICO’s is murky as investors and companies wait to see what, if any, action is taken by regulators around the world. While nobody is sure of what exactly will happen, most expect there to be increased regulation that will likely lead to a slowdown in the rapid growth of this new economy capital funding instrument.

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