Contrasting against traditional fundraising, Initial Coin Offerings (ICOs) promise to offer many advantages. They are easier to issue, require less paperwork, and offer quick sales, thus bringing perks that other traditional methods can’t offer. This has made a lot of companies and organizations want to raise their funds through ICOs. But, with the rise in scams and trouble with regulators, this has been harder than ever. However, this has not stopped some major organizations from pursuing ICOs, like South Korea’s Kakao.
ICOs and regulation
Currently, there are almost no regulations over ICOs. Although ICOs have been around from 2013, they have only hit mainstream corporations from 2017, and it is unlikely that such a new phenomenon has regulations. ICOs sometimes have been called securities but it fails the Howey test. The ‘Howey Test’ is a test created by the Supreme Court of the United States to check if something is a security contract or not. Under the Howey Test, a transaction is a securities contract if it fulfills certain conditions. Firstly It should be an investment made in money. Also, there is an expectation of profits from the investment and the investment of money is in a common enterprise. Lastly, any profit comes from the efforts of a promoter or third party. In November this year, a US district court judge ruled that ICOs are not securities pointing out to the fact that they do not pass the Howey test. This dilemma has posed global governments with a huge issue. They have been wanting to regulate ICOs but there are no laws that can regulate them forcing some governments like China and South Korea to ban them outright, while the US SEC has pursued a method of going after the promoters rather than the ICOs themselves. This constant fight with regulators has forced some companies to go to extreme lengths to secure funds through ICOs.
The Kakao story
Kakao is a large Korean conglomerate focusing mainly on internet applications. Kakao is currently in the process of raising funds for its clay project. They are targeting to raise $300 million in funds for this project. Kakao has been trying to raise funds for its clay project through an ICO for some time. Earlier, Kakao attempted to do a public token sale of the same ICO through a local entity in Switzerland but due to the opposition from the Financial Services Commission (FSC), that plan was dropped. Right now, the company is pursuing a completely different method from its initial plan to go public by doing the token sale in private. A private sale is a smart move from the side of the company to avoid trouble with regulators, but raising funds is a struggle in private sales.
In private sales, only registered, accredited and approved institutional investors are allowed to invest. This is one of the reasons companies avoid private sales as it is much harder to raise funds. Kakao is going through all this trouble to avoid any confrontation with the government. As they are an established company, complying with regulations is much more important than just raising funds. The ICO is handled by Ground X, a subsidiary of Kakao based in Japan. The recent rules have made Japan a hotbed for ICO activities. This is one of the reasons Kakao chose Japan over South Korea. During the last three months, South Korea has significantly progressed its cryptocurrency rules, even officially allowing banks to work freely with cryptocurrency exchanges. But the government has yet to make any official move on ICOs. How South Korean authorities react to this is yet to be seen, even though Ground X is a Japanese entity doing a token sale in Japan. The way FSC blocked the public sale in Switzerland would serve as a reminder that they can get involved in this sale too. Ground X is rumored to have secured most of the $300 million in funding.
This is a stark reminder to governments that crypto is here to stay and banning it is not sustainable. Companies and investors will move to countries where there are favorable conditions leaving others behind. There is nothing to be gained from trying to stop this new technology while those who embrace it will surely profit a lot.