Corporate ICOs - how to succeed in a brave new world

THE year 2018 has been a strong one for Initial Coin Offerings (ICOs), with blockchain startups having raised over US$18 billion thus far, which is five times the 2017 total, according to CoinSchedule. It's quite clear that digital currencies and blockchain technology are most certainly here to stay. ICOs and cryptocurrencies are no longer just the interest and domain of non-listed unconventional startups. More "traditional" and listed companies are starting to dip their toes into the cryptocurrency space, whether through incorporating blockchain technology to enhance operations or tokenising business offerings. As such, ensuring that their ICOs possess the right ingredients for success is more vital than ever before.

Given the dubious nature of many recent ICOs, it is of paramount importance that traditional companies looking to launch ICOs have to exercise extra rigour in ensuring that good governance, compliance and audit controls are firmly in place to satisfy their board and shareholders. The business case for the ICO must be well thought out, with a strong value proposition for the user that is sustainable, and competent professionals must be engaged to launch the offering. Indeed, as the market grows more sophisticated, ICOs will come under greater scrutiny, with a stringent and meticulous process resembling traditional IPOs.

As the first listed company in Singapore to launch an ICO, we have had to meet a higher level of compliance and regulatory rigour as compared to a private entity. The process - while making our ICO launch more challenging than others - has given us insights into what it takes to launch an ICO product that has a real use case and will benefit the community for the long term.

THE BUSINESS CASE AND VALUE

Given the growing sophistication of crypto investors, the business case should be unique, offer strong value to the end user and community, and most of all, be sustainable. The white paper should be clear in the value proposition and purpose of the token; and plans for the ICO should be properly communicated to the public. Financial modelling on funds raised, demand forecasting and sensitivity analysis done on best- and worst-case scenarios will also help provide a better picture of the road ahead.

COMPLIANCE AND REGULATIONS

The ICO white paper, contracts and materials must be thoroughly vetted by competent legal professionals to ensure the offering does not run afoul of existing laws and regulations. As the space grows, regulators are also increasingly equipping themselves with the relevant knowledge to handle business operations involving crypto-assets and tokenomics. At the same time, all companies entering this space, even non-financial institutions, must have robust Know-Your-Customer (KYC) and Anti-Money Laundering (AML) policies and processes to protect themselves from inadvertently facilitating undesirable transactions.

ACCOUNTING AND INTERNAL CONTROLS

In this brave new world, we are aware that current accounting guidelines do not - quite understandably - have clearly-defined provisions for crypto-assets and token operations. Until clearer rules come into effect, companies will need to work with professionals to develop internal accounting policies that make most sense for their token business. Accounting entries for ICO fund raising, exchange listing and token operations are currently non-existent items for most "traditional" companies. How a company addresses the accounting for these items, for example, will need to be reflected in the financial statements.

Cryptocurrencies will also have to consider certain processes for internal control. For example, funds held by a traditional corporation in a bank can typically be accessed only by dual (sometimes more) signatories. How does that apply to a cryptocurrency hardware wallet? What should be the maximum amount at any given time in a single hardware wallet? If the wallet is lost in transit, what is the recovery policy? Who has access to the seed phrases (a list of words that store all the information needed to recover a crypto wallet)?

Questions like the above are not impossible to answer but will require time to figure out the most sensible approach. We will also need to take into account the operational nature of the business that could influence the controls and risk management required.

STAYING THE COURSE

Companies will have to ensure, regardless of the performance of their ICOs, that once the soft cap has been surpassed they will stay the course for the good of token holders. An ICO is a best-effort promise to deliver a product (tied to a token) that will potentially make everyone's lives easier, change the world for the better or just let us all have more fun. And promises should be kept.

In summary, earnest, thoughtful preparation will pay off in spades when trying to win buy-in from stakeholders - whether regulators or users. Working with reputable professionals across the board (accounting, legal, compliance service providers, etc) and directly engaging regulators and other stakeholders from the get-go is a must. Planning well will also give comfort to the company's traditional business partners (that is, banks and third-party service providers) and likely encourage greater participation in this new crypto ecosystem.