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Could ICOs be the future of funding for startups?


Funding through ICOs allows startups to raise investments from a segment that previously did not invest in startups. ICOs as a phenomenon exploded in 2017, but this new type of funding also brings along new challenges that authorities are now dealing with.

6,391,370,880 US dollars.

That was the amount of money raised globally through the new way of investing called ICO – Initial Coin Offerings – up until November of last year according to the research company Elementus.

We’ve most likely only seen a glimpse of the potential since $6,000,000,000 was raised through ICOs in 2017 alone.

As a funding option, an ICO is still a rare method in Denmark, but Danish startup Aryze see great potential in the method.

“If you chose a traditional funding structure from family, fools and friends, Angels, VCs and public funding your startup is locally anchored. Large VCs from Silicon Valley will not talk to you unless you’re based in Silicon Valley. But if you do an ICO from an early stage, you have already crossed borders. And getting an active community attached to this type of funding means that you get ambassadors across the globe that will give you a lot of value. Not just for performance for the ICO, but for the entire business development,” Morten Nielsen says, CFO in Aryze.

The startup aims to raise an impressive amount of funding from the ICO to build a global success: Between 120 to 150 million kroner.

But the rapidly growing trend of ICOs isn’t just giving startups a new way to raise funding and recruit ambassadors. It also brings challenges to the regulatory framework.

Regulatory affairs: Case-by-case assessment

Companies raise money through ICOs by issuing their own cryptocurrency or token on a blockchain available for public purchase. That means that a new and global segment of investors – especially private investors who up until now did not invest in startups – now have the opportunity to invest in and fund startups.

A handful of Nordic startups have already raised money through an ICO. The Danish startup Blockshipping just announced their ambitions to raise 150 million through an ICO as their financial vehicle.

In other words, the method of financing investment is gaining traction in Denmark. And because ICOs bring products and services on top of the blockchain – opposed to Bitcoin or Litecoin that exclusively exchange coins – the Danish FSA has been forced to further investigate the phenomena.

”We received the first inquiries about ICOs in summer 2017, and in November we stated our view on the tendencies. The essence of the statement is that if your token or coin is only usable in the mean of exchange, then it’s not regulated in Denmark. But some of these tokens started to resemble other financial instruments. They grant dividends, ownership rights to an underlying asset and so on,” said Jon Hasling Kyed, Cheif special advisor at the Danish Financial Supervisory Authority, recently at a Get Fit event on the future of funding at Copenhagen Fintech Lab.

Even though the method of raising funds by issuing a digital coin is called commonly called an ICO, the subsequent projects and the way they utilize their tokens differ greatly. And that poses a regulatory challenge.

“I have yet to see two identical ICOs. Up until now, they’ve all been different. So, therefore, we will have to assess the cases individually, especially because ICO’s hasn’t been written into the regulatory framework yet. We will have to assess the cases to see if there are similarities to other more traditional instruments, so an ICO must be regulated,” Jon Hasling Kyed said.

The Danish FSA has not yet released guidelines on how to regulate an ICO according to current regulations. But the authority is warming up to the idea that an ICO project could be a part of the regulatory sandbox that accepts its first cohort later this year.

“We would like the five to six projects that we accept into the sandbox to represent different areas within Fintech. This also means that if there is an interesting proposal on ICOs with the bonus of increasing our knowledge in FSA on the regulation, then yes, we would be interested without a doubt,” said Jon Hasling Kyed.

From left to right Jon Kyed FSA Omri Ross Firmo Morten Nielsen Aryze Urmas Peiker Funderbeam at Get Fit Financial regulation and the future of funding event at Copenhagen Fintech LabPhoto Carl Jenster

The Attorney General: “This is no wild west despite lack of regulation.”

Because there are no guidelines from the Danish FSA or regulations on ICOs startups are forced to seek professional legal advice when they choose this funding method instead of business angels or a venture fund.

In Denmark Senior Manager with the Attorney General, Tanja Lind Melskens has experience in dealing with ICOs as she has advised Blockshipping as well as Aryze.

“If companies choose that an ICO is the right funding strategy they need to think the process through before starting. One of the most important legal inquiries is if the issued token is considered a security offering,” she explains.

Tanja Lind Melskens

Today, the majority of the ICO funded startups are not subjects to financial regulation, but that does not mean that the project is situated somewhere in the underbelly of the internet or in the wild west – it is still subject to other regulations such as the Consumer Act and the Marketing Act.

“Even though ICOs are not security offerings they bear a resemblance to investments. Companies should consider if they need to take precautions and implement some degree of protection like we know from the financial regulation. This is something we often discuss with the startups; what principles from the regulations that we should follow to be cautious,” says Tanja Lind Melskens.

This means that some of the companies The Attorney General has advised have done an anti-money laundering check as well as aptitude tests on potential investors to stay ahead of legislation.

“The Danish FSA has – as opposed to what we hear from other countries – made an effort to become knowledgeable on the matter and assumed a somewhat position when they assess the companies that seek their advice. They share our perspective and investigate if it could be possible for companies to gain access to venture capital. Meanwhile, we must protect consumers and the financial market at the same time,” says Tanja Lind Melskens.

Tip of the iceberg

Aryze has considered financing their platform through an ICO, and Morten Nielsen believes that the method can speed the funding process up – compared to traditional funding methods.

“The requirements for traditional companies to become funded are often higher than blockchain and internet firms that are seeking ICO funding. Traditionally, firms will be expected to come up with a thorough analysis of financial prospects, minimum viable products, extensive market research, as well as precise documentation. Companies seeking ICO frameworks as a fundraising method don’t necessarily have the same constraints placed on them,” Morten Nielsen says.

The opportunity to raise this large sum of money for such a young startup gives the company the ability to focus on becoming a global success according to Morten Nielsen.

“We cannot make a business model for Denmark and then scale. That way we will be overtaken by competitors. With an ICO we do not suddenly find ourselves in need of capital in a tough and competitive funding market. The structure of the Danish capital market entails that it is not possible to raise such a large and swift investment as an ICO offers,” he says.

He acknowledges that other startups have raised enormous ICO investments without gaining any noteworthy traction after the offering and that others have used the unregulated investment model for scams. This is the reason why regulation is needed, but at the same time, the democratization also brings with it opportunities for startups and small-time investors.

“Of course, it is risky, but there is also the possibility to make some really good investments. We assume that the people backing us are smart so why should ordinary people be excluded from investing in this space?” Morten Nielsen asks.

And asked the question, if those huge ICO fundings will continue or it’s just a hyped space right now, he answers promptly:

“I don’t think it’s even started yet.”


We earlier stated that Aryze was planning an ICO later in 2018. This has been changed due to legal conditions.

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