25/09/2018 - Original Publish

ICO stands for Initial Coin Offering. The acronym is intentionally similar to the famous IPO, or Initial Public Offering, which refers to the moment in which a company starts to offer its shares to the general public by becoming listed.

In an ICO, a company wishing to raise funds for use in the development of new projects generally relating to encryption offers tokens to investors in exchange for capital that may be paid in actual currencies (such as Dollars or Euros) or virtual currencies (such as Bitcoin and Ethereum), depending on what the offering company proposes. A whitepaper (a type of prospectus that may be reviewed by potential investors) usually contains the terms of the offer and the whole transaction takes place digitally.

If the offering target is reached, investors receive tokens that work as virtual coins and may be subsequently traded on virtual currency exchanges.

An example of a successful ICO was the launch of smart contracts platform Ethereum. The investors in the platform that develops smart contracts based on blockchain technology received Ethers in exchange for their investments. Ether is currently the second largest virtual currency in trading volume (exceeded only by Bitcoins).

This type of offering, however, is not regulated by government agencies and regulators. Therefore, as is the case with virtual currencies, there is no assurance of honesty or correctness. The system is entirely based on the trust between issuers and investors.

In Brazil, the Brazilian Securities Commission (CVM) is keeping track of global trends and has publicly warned that some types of ICO could be construed as issues of securities, in particular when investors are given rights to participate in the share capital of the company receiving investments or a fixed return over the invested capital. In these cases, any offering should comply with Brazilian securities offering rules, if directed to Brazilian residents. The CVM also warned about the risks associated with ICOs, recommending caution to those interested in this form of investment.

Still in the context of cryptocurrencies, the CVM has recently published Circular SIN no. 11/2018, addressed to fund managers, portfolio managers and investment fund auditors, clarifying the CVM Instruction no. 555 does not prohibit indirect investments in cryptocurrencies overseas, but this type of transaction should raise additional concerns with the risk of funding illegal transactions, money laundering and fraudulent transactions, as well as investment pricing.

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