Initial Coin Offering (ICO) as an innovative form of financing
The EY Start-up initiative supports your start-up right from the start. In all relevant strategic, tax, business, legal and financial issues. In all phases. We help you to get the right answers to important questions.
For instance, you don’t know which form of financing is best for you start-up. Adrian Wons can tell you what to look out for when financing with Initial Coin Offering (ICO).
There has been a boom in Initial Coin Offerings (ICO), also known as “Token Sales” or “Token Generating Events”), a form of financing which makes use of blockchain technology. As the name suggests, digital tokens are issued, which can have different functions or carry different rights. For example, they can stand for a digital share that is needed to gain access to the proposed blockchain platform. Compared to other forms of financing, an ICO is an innovative way of raising capital. It offers many advantages, as the token issued is a highly liquid investment and an ICO can quickly reach a wide range of potential investors.
But there are many challenges to overcome before launching an ICO. You should therefore consult experts in this field at an early stage and obtain legal and/or tax advice. First and foremost, however, you should consider whether the decentralized approach of blockchain actually offers an advantage for your desired business model. Only tokens that really represent an added value for the investor will be successful in the subsequent sale. Token design is therefore one of the most important aspects of the ICO: depending on the chosen design, there will be different legal, tax, and even strategic implications. If your own business model has nothing to do with blockchain and its decentralized approach, you should not try to make a case for blockchain. Because then it is worth considering a so-called security or equity token. With this type of token, the rights that are transferred to the investor are subject to supervisory regulations (prospectus requirement). So, contrary to popular belief, tokens are regulated in Germany depending on their design.
In summary, a utility token, and thus an ICO that is not subject to supervisory regulations, is still a valid option when trying to raise capital for a decentralized business model. However, such a token really only makes sense with deep-tech blockchain models, and you should refrain from using it in other cases. This does not mean that you cannot benefit from the many advantages of blockchain: an equity token is a viable option, especially for those companies that do not (fully) meet the legal turnover and capitalization thresholds for an IPO.
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