The decentralized fundraising method of ICOs gained huge traction during the crypto bull run of 2017. A number of cryptocurrency companies distributed their digital tokens to investors against Bitcoin (BTC) or fiat investments.
Initial Coin Offerings provides entrepreneurs with a potential alternative of fundraising against the limited access to capital. However, with several emerging frauds and dubious projects last year, regulators decided to step-in.
A report from the C.D. Howe Institute raises the need for smart guidelines to obtain the right balance between innovation and investor protection.
Three Criteria to Opt for ICOs as a Way of Financing
Authors of the report –Thorsten Koeppl and Jeremy Kronick – outline a simple test to determine whether or not an ICO can prove to be fruitful to a business. The authors also provide three criteria a business show follow to opt for ICO financing.
- A decentralized platform, usually based on blockchain technology.
- A cryptocoin gives digital access to the platform.
- The cryptocoin gives a means of payment for users that engage in a decentralized, person-to-person (P2P) exchange in order to create and transfer value between them.
Hence, if a business is to follow these three criteria, it won’t suffer any sort of regulatory hurdle.
Sailing through the Canadian Securities Regulators
The authors also note that for ICOs to pass the above test, Canadian securities regulators have developed specific regulations. ICOs passing the above test get an exemption from onerous disclosure requirements, and special grants for an extended time frame. They also receive exemptions from securities dealer registration requirements and the restriction of investments to smaller amounts.
Rather than going through all this hassle, the above test quickly decides whether or not an ICO makes its way through the Canadian Securities Administrators Sandbox.
“Our proposed test can also create guidelines for the right approach to taxation that is consistent with the value that is added by such financing,” notes Koeppl. “Tax rules can be based on the dual roles of the coins, which are both an investment stake and a currency.”
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