ICO’s Explained

Scott Purcell  |

"ICO”. “Blockchain”. “Digital wallet”. “Crypto”. “Bitcoin”. “Tokens”. “SAFT”.

Wow, the acronyms are a bit overwhelming. Let’s simplify things…

An “Initial Coin Offering” (ICO) is not a Bitcoin. It is a securities offering by a company that is raising capital, or a participation interest in something (more on that in a moment). What does that mean exactly?


The analogy I like to use (dust off your history books) is Gold Certificates. Since gold is heavy and difficult to transport, in the 1800’s various repositories (e.g. the US Treasury, some states, some banks, some mining company's and others) issued paper certificates representing some value backed by ounces of gold. Interestingly, these paper certificates were called “Gold Coin”.

Now, imagine you had one of these paper "gold coin" certificates and gave it to your broker at Merrill Lynch to put into your account. This makes a lot of sense because you don’t want to risk losing the paper, and you’d rather see your ownership on a Merrill Lynch monthly statement than have the real thing sitting in your desk drawer.


So, your ownership of physical gold that was represented by a paper certificate is now in custody at Merrill Lynch who will now send you electronic statements. Yes, you own the gold…but your ownership is now represented electronically when you log onto your Merrill account online.

If you sell the gold certificate, and if it goes to another Merrill Lynch customer, then the broker just records the ownership change on their books/ledgers; showing it as “sold” in your account, crediting your cash proceeds, and showing it as “bought” in the other customers account, debiting the purchase price.


Today that electronic interest in a physical asset (gold) is still called a “Coin”, aka a “Token”. And while you might have it held by a brokerage firm or trust company, you can also hold it directly in your name in the accounting ledgers of the issuer (roughly, the “blockchain”). If you hold it directly in your name (instead of held by your broker or trust company) and want to sell it to someone who wants to buy it, that is now becoming possible via various blockchain-enabled listing services and trading exchanges being built by StartEngine, T0 and others.


Besides gold, what kinds of things can you “tokenize” (in other words, create “certificates/coins” which represent something that isn’t easily portable)? Well, just about anything! Including…

  • Commodities such as gold, silver, platinum, diamonds, etc
  • Equity interests in businesses (aka "stocks")
  • Debit issued by businesses (aka “bonds”)
  • Real estate
  • Royalty agreements
  • Intellectual property agreements
  • Rights to songs or movies
  • …anything that has value but is difficult to transport. e.g. how can you buy an interest in the rental income from a giant office building? And in such a way that it is easy to sell if you need to (and can find a buyer)? A coin (token) allows the building owner to sell small interests to a lot of people, and easily send rental payments to the coin-holders.


There is a TREMENDOUS amount of hype about ICO’s at the moment. This has led to some idiotic investments in fraudulent offerings (already seeing regulatory and law enforcement actions). However, there are plenty of real investments out there; people who are raising money via sales of tokens (digital contracts of something) for real businesses, real assets or other things of discernible value.

Don’t be like the immigrants stepping off the boat in the 1800’s who "invested" in a piece of the Brooklyn Bridge. Silly as it sounds, it’s a very real threat in the current wild-west situation of ICO’s. You must carefully review the offering, vet the underlying assets that the coin/token claims to represent, understand the custody/security of those assets, analyze the team of the company issuing the coins and be comfortable that the issuer isn’t violating any securities or other laws… and then make your investment decision.

=> Anyone who tells you that the coin from their ICO will quickly go up in value is lying.
=> Anyone who tells you that the coin they are selling will be easily and readily liquid is lying.
! Run from those as almost without fail they are Ponzi schemes.

How to do it right? Trust those registered, regulated, insured professionals who are leading this. I just came from StartEngine’s excellent ‘ICO 2.0 Summit’, which was well attended by securities professionals, attorney’s, regulators and digital-industry entrepreneurs who are all working hard to responsibly deliver on the amazing opportunity of digital contacts, aka coins, aka tokens.

About the Author: Scott Purcell is the CEO and Chief Trust Officer of Prime Trust, the leading tech-driven trust company serving the crowdfunding industry. He is also the CEO of FundAmerica, the fintech services provider to the equity and debt crowdfunding industry. FundAmerica provides escrow, payment processing, and compliance technology for numerous broker-dealers, investment advisers, portals and others who make a business of online capital formation pursuant to rules now in effect thanks to the JOBS Act. He is a founding Board member of the Crowdfunding Intermediary Regulatory Association (CFIRA) and the author of the book “The Definitive Guide to Equity and Debt Crowdfunding” as well as the “Industry Best Practices for Funding Portals”.

Legal Disclaimer:
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice, nor are they a recommendation to, or an offer of any securities. I am not advocating, advising or recommending anyone purchase or not-purchase any specific or general investment of any type, ever. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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