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ICO market: From fundraising tool to an ‘unregulated security’


ICO market


Blockchain technology has the potential to disrupt scores of industries, and it is already making headway in some sectors. Most notably the financial sector, where blockchain’s most popular use-case cryptocurrency, is fostering a paradigm shift in perspective in how people interact with money. Nearly five years after the birth of the first cryptocurrency Bitcoin, came the first Initial Coin Offering or an ICO. An ICO is a type of fundraising for businesses usually through crowdfunding. This type of fundraising quickly gained popularity amongst cash-starved entrepreneurs as it enabled them to avoid regulatory and legal hurdles. Some might argue this very attribute of ICOs is what led to their downfall. 


ICOs stint with Regulatory authorities


During the ICO boom period, startups managed to raise as much as $20 billion, an unbelievable amount raised through crowdsourcing! The lack of a regulatory and legal framework in the ICO space, undoubtedly attracted many bad actors. A study by ICO advisory firm Statis Group, concluded that almost 80% of all ICOs conducted in 2017 were a scam. A conservative estimate by blockchain intelligence firm Diar estimates that investors lost close to $100 million in ICO exit scams. These developments in the crypto space forced regulatory authorities to take action in order to protect investors from fraudulent activities. 


The U.S. Securities and Exchange Commission (SEC) first classified an ICO as an ‘unregulated security’ in 2017, when the regulatory organization analysed the DAO ICO.The SEC classified DAO’s ICO as an unregulated security under Securities Act of 1933 and the SEC v. W.J. Howey Co. Supreme Court case of 1946, the latter became more commonly known as the Howey test. Under this act DAO’s ICO was classified as an unregulated security but did not pursue charges against the management. Paradoxically, this was before ICOs took off as a fundraising tool. To know more about DAO report check out Coindesk’s article. 


SEC takes action


As a direct result of the numerous ICO scams that emerged that left investors to speculate about their money, the SEC started taking action against ICOs of questionable characteristics. Most notably charges against two ICOs Airfox and Paragon, who were served with cease and desist orders.




Airfox is an Ethereum based platform with ambitious aims disrupting the telecommunications industry and financial services industry. Airfox managed to $15 million through the sale of its native AIR token, the company planned on bringing a novel mobile banking solution to emerging markets. Airfox settled charges against them by repaying the funds raised to investors and paying a fine of $2,50,000. To more know about Airfox, check out InWara’s article.




Paragon was blockchain startup brings forward a unique proposition to work toward full legalization of Cannabis. In 2017, the company managed to raise $12 million through the sale of its native Paragon Coin. Paragon settled charges with the SEC by paying a fine of $250,000 and repaying funds raised to investors.


# of various charges against ICOs

Source: InWara’s litigation and compliance database


The number of charges filed against ICOs surged after the numerous ICO scams that emerged. An incredible 48% of the charges were cease and desist orders, which is a legally enforceable order that directs an enterprise or individual to stop engaging in a certain activity because of alleged wrongdoing. 17% of charges were class action complaints and 14% were information demand letters. 

Despite the good intention behind these charges, there are many who believe these actions led to bearish market trends prevalent in the crypto space currently. Retail and professional Investors are wary of ICOs and hence entrepreneurs are finding it increasingly difficult to raise funds through Initial Coin Offerings. The market seems to sway towards an alternative to ICOs currently, Security Token Offerings. To know more about STOs check out InWara’s article.

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