Everyone has a partial idea what Initial Coin Offerings (ICOs) are. This is because of their current popularity which boomed in 2017 with the growth of the cryptocurrency sector. However, very few people know what actually ICOs are and how they fit into the regulatory landscape. To understand what ICOs are, you must trace back to 1946 at the Florida Orange grove Case. The matter was well explained by Peter Van Valkenburgh who is the director of research Coin Center.
Peter was talking about the need for investors to be cautious about the ICOs to invest in. During this interview, he took the opportunity to explain what ICOs are and their origin. According to him:
“There is no legal definition of what an ICO is because it’s just an imagined term. ICO come from the term Investment contract which does not have a definitive meaning. The term was defined by courts in 1946 in the case where a guy was selling tracks of Orange Groves to people in New England and make them sign a contract that they would maintain the firm, pick the orange groves, sale them and then give him the profits.”
According to SEC in 1946 during the hearing of the case in a court of appeal, they explained that the man would invite people to his hotel and then walk them around his firm then tell them that the oranges are for sale. He would then contract the people to maintain the tracks and sell the Orange Grove. According to SEC’S presentation, it looked like an investment contract which is currently regulated as securities.
Peter went on to explain that the 1946 Orange Grove case is similar to the currency ICOs where one invites investors with a promises of tokens and some profit. The selling of tokens is similar to owning the land and ensuring that it’s profitable for you to benefit.
Tokens started majorly in 2014. The first ICO in 2014 was Mastercoin which was followed by the Ethereum. However, during that time, there was no much hype on the tokens. At the time the market was better because the developers did not use celebrities like Floyd Mayweather to influence the sale of an ICO. More to that there was no liquid secondary markets where you would go and transfer a token before its existence. Currently you can do day trading immediately after the ICO sale. The current liquidity is very dangerous because people can do nasty things like pump and dump schemes.
The market has some good guys who are people who started a project without an ICO but have a token. People who have coins which came into existence through mining as a reward for people who provide useful services to the decentralized network because there are no companies backing such coins like Bitcoin.
Peter concluded by stating that not all ICOs are securities, but most of them qualify to be securities. More to that cryptocurrency does not qualify to be security. He noted that selling future tokens will be under the securities law which means that all ICOs need to comply with these laws.