Regulators seek to curb initial coin offerings

In a statement, China’s central bank declared fundraisings by token sale as illegal acts, citing an effort to control “market chaos” and a number of fraud-related risks. The ban coincided with a notice from Hong Kong’s Securities & Futures Commission that warned digital tokens could be subject to securities laws.

It comes after a flurry of large unregulated fundraisings saw ICOs surpass traditional equity funding by venture capital firms as the leading source of capital in seed-stage rounds.

Although digital tokens do not provide investors with ownership stakes, they are sold in much the same way as company shares, offering upside if operational success prompts increased demand. However, as blockchain-based units representing specific business exposure rights, they have so far remained largely outside of the legal oversight for securities.

China’s crackdown on the funding model has already resulted in the delisting of a number of cryptocurrencies, including the local Ethereum competitor Neo, formerly known as AntShares. The latest restrictions build on similar momentum in the US and Singapore, where tokens have been interpreted in recent months as properties already within the purview of securities regulators.

“While this will certainly makes it more difficult for Chinese-incorporated, token-leveraged companies to ICO or remain listed on Chinese exchanges, this doesn't necessarily preclude Chinese investors from buying or selling tokens on other exchanges,” said Justin Hall, a principal at Singapore-based Golden Gate Ventures. “Simply because the Chinese exchanges have closed, or the ruling party made ICOs illegal, certainly doesn't mean local investors don't have dozens of other options available to them to participate in ICOs or trade existing tokens if they so wish.”

In July, Golden Gate participated in a $25 million token sale by Thailand-based financial technology company Omise that was touted as the first cryptocurrency capital raise by a major VC-backed start-up. Other recent VC-backed token sales in the region include a $9 million raise by Japan’s Tech Bureau and a $26 million raise by Funfair, a Singapore-based company that uses blockchain technology to operate an online cryptocurrency casino.

Globally, capital raised by company token sales was said to exceed $500 million and $300 million across June and July, respectively. Early-stage VC funding by comparison came in at $200-300 million for the same period.

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• Topics
• Greater China
• Financials
• Technology
• Fundraising
• Regulation
• China
• Hong Kong (China)
• Venture