Startups in the European markets have raised more capital through initial coin offerings (ICOs) in the last three years than any other region on earth. This is not a statement, but findings of a study, conducted by venture capital firm Aomico.
According to their study, over 40 percent of all ICOs are based in the European Union (EU) region. They witnessed over 446 transactions, raising slightly over $1.76 billion which is nearly half of the worldwide total capital raised via token sale.
As a result of this wider receptivity, cryptocurrencies and ICOs are a popular subject of discussion and questions in all EU countries, and Germany is no exception. Since it is home to roughly 10 percent of the total European population and 5th largest economy in the world, it has witnessed a sharp rise in crypto-related business activity.
Sensing the need, the country’s Federal Financial Supervisory Authority (BaFin) has clarified obligations and rules for Initial Coin Offering (ICO). As an update on the basic guidelines issued last year, the regulatory body has followed up with a new release due to increased queries about the legal status of the cryptocurrencies and ICOs.
The update comes “against a background of increased inquiries to BaFin regarding the areas of securities and asset management,” the note states, with potential ICO operators enquiring “whether the underlying tokens, coins or cryptocurrencies behind so-called ICOs are viewed as financial instruments within the area of securities supervision.”
The note reads: “Generally speaking, cryptocurrency tokens constitute financial instruments (units of account) within the meaning of the KWG. Therefore, undertakings and persons that arrange the acquisition of tokens, sell or purchase tokens on a commercial basis, or operate secondary market platforms on which tokens are traded are generally required to obtain authorization from BaFin in advance.”
It also advises the consumers to verify the identity, reputability and credit standing of the token issuer, before making an investment decision. Because the issuer is not subject to any transparency requirements, it is solely the responsibility of the investors to protect themselves. Therefore, investors should follow the guidelines and get updates about the domicile, legal form and capital resources of the offeror as well as the parties participating.
In addition to this, the latest release points out some of the biggest challenges that (ICO) investors may face, and need to address before investing.
Risks Associated with ICO:
- Total Loss: ICOs are a high-risk investment, a total loss of the invested amount is possible. Hence, be very careful when you invest.
- No Regulations: A number of ICOs are conducted in a totally unregulated environment, assuring no security to the investors. Stay away from those!
- Insufficient Information: There are ICOs that do not offer complete information to the investors. This lack of clear picture can result in fraud and bad investment decisions.
- Technical Risk: An investor lacking extensive technical knowledge about the ICO may be more vulnerable to risks than someone with more knowledge of the technicalities involved.
- Project Risks: There are chances that the project or product (for which ICO is being conducted) is still in early-stage, and may not be sustainable in the long-run.
What to Do?
There are a couple of simple things that investors should do, in order to protect themselves against the risks involved. First, educate themselves about the ICO guidelines (by the regulator), the team behind ICO, the project/product involved, and domicile. Secondly, get in touch with some ICO consultants or investment professionals who could advise on whether to invest in a particular project or not.
At InWage, we help companies and people raise capital through ICO, and help across the process. If you aim to go for the token sale, get in touch, and we’ll help you wherever you are.