Legal Assessment on the Difference between Initial Coin Offering (“ICO”) and Initial Public Offering (“IPO”) 7 January 2019

Initial Coin Offering (“ICO”), which has been regulated as Crowd Funding in our legislation, is an alternative system to the bought deal of Initial Public Offering (“IPO”). Although it is a new system, ICO becomes widespread as the economies also become digital day by day.

IPO is a system in which money is collected from the investors and investors receive share certificate, which is a valuable paper, in return. In modern times, the first IPO was performed by Dutch East India Company in March 1602, in order to increase its capital; therefore, Dutch East India Company is considered as the first public company as it distributed its share certificates to the investors. With this regard, IPO has a history of more than 400 years.

However, ICO is a system in which money is collected from the investors but investors receive digital currency instead of share certificate. With this sense, ICOs are performed digitally as the digital currencies are produced and sold in digital platform. Besides, ICO is a new and developing system since the first IPO was performed in July 2013 by Mastercoin, which is known as Omni Layer. Additionally, the value of the digital currency which is received in return for the investment, shall be increased in accordance with the success of the invested project or the company. Therefore, ICOs would be open to speculation.

IPO has been regulated both in national and international legislation, as it is a well-established system which has been performed for a long time. With this regard, the method of issuance of the share certificates and the conditions of performing IPO are regulated in legislations. However, there are different approaches to ICOs in foreign legislations. For example, according to the guideline of Abu Dhabi stock exchange, it is stated that the characteristics of the digital currency which is committed in return, shall be evaluated. So, if the characteristics of the committed digital currency are similar to the share certificate, the digital currency shall be considered as valuable paper; however, if not, then the digital currency shall be considered as a commodity as digital currency cannot be accepted as a currency but it has a value. On the contrary, many countries have a tendency to forbid ICO and initiate legal proceedings against the ones who collect money through ICO. Therefore, both positive and negative approaches could be found in foreign legislations.

IPO is the most common way of providing capital and it provides assurance to the investors as share certificates are given in return of the invested money. However, ICOs are considered as the future way of providing capital. With this regard, although ICO is a new and developing system, it would become preferable and it shall be regulated in detailed since it allows collecting high amount of capital in a very short time and it promises investors to make high amount of profit.