How should formal ICO projects prevent being identified as illegal fundraising?

【Summary】Formal ICO projects must ensure that their plans are feasible, that the source and use of funds are real and transparent, that no returns are promised, and that investors have the ability to bear risks to avoid being mistakenly identified as illegal fund-raising. The author suggests that while strengthening supervision of ICO projects, inclusive supervision should be implemented in terms of the number of investors and publicity methods.

Recently, the Legislative Affairs Office of the State Council published the "Regulations on Dealing with Illegal Fund Raising (Draft for Comments)" (hereinafter referred to as the "Draft") on its official website. It mentioned that those who raise funds in the name of "virtual currency" may face administrative investigations for illegal fund raising, which caused quite a stir in the currency circle. Some people believe that ICO projects are actually fish under the knife of supervision and may be ordered to stop at any time. The author believes that this understanding is incorrect. The "Draft" also lists various other "names" together with digital currency, and many other activities themselves are not illegal activities, but are often used to cover up illegal fund raising, and digital currency is no exception. Therefore, we believe that ICO projects are not all stopped, but if they are suspected of illegal fund raising in the name of ICO projects, they will be investigated and dealt with, which is very reasonable.

In fact, the State Council recently issued the " Guiding Opinions of the State Council on Further Expanding and Upgrading Information Consumption and Continuously Unleashing Domestic Demand Potential " (Guo Fa [ 2017] No. 40), which clearly mentioned " encouraging the use of open source code to develop personalized software and carry out pilot applications based on new technologies such as blockchain and artificial intelligence ", and proposed " adhering to inclusive and prudent supervision, strengthening classified guidance, deepening the reform of 'delegating power, delegating power, and serving the people', continuing to promote the pilot of 'separation of licenses and certificates' in the field of information consumption, further simplifying and optimizing business processing procedures, promoting a list management system, and relaxing market access for new business forms and models " in the annex to the notice. It also clearly stated that the Ministry of Industry and Information Technology, the National Development and Reform Commission, the Ministry of Science and Technology, etc. are responsible for "encouraging the use of open source code to develop personalized software and carry out pilot applications based on new technologies such as blockchain and artificial intelligence".

Currently, new technologies including blockchain technology are developing rapidly and cannot be changed by human will. The country's basic attitude of inclusive supervision and differentiated supervision towards ICO supervision has not changed. The country will not crack down on genuine blockchain ICO projects, but will encourage and support them.

Because blockchain technology application projects are developing in full swing, illegal fund-raising personnel are likely to use the name of ICO to raise money and defraud when many other pretexts have failed. Not only will many investors be deceived and suffer unnecessary property losses, but the development of the ICO industry will also be troubled, and even some legal and formal ICO projects will be mistakenly killed by regulatory authorities. Therefore, when the founding team starts an ICO project, it is very necessary to take some legal and compliance precautions. Let's discuss how ICO projects can prevent illegal fund-raising in conjunction with the "Draft Opinion".

1. The ICO project plan should be specific and feasible

The Draft Opinion mentions that an important feature of illegal fundraising is “no substantial production and business activities” . The original intention of ICO is to provide a start-up fund for a good blockchain technology application project. Of course, if the project is successful, it will inevitably bring certain returns to the early investors. However, the success of ICO projects is not inevitable. A technically perfect project may not necessarily succeed in the market; on the contrary, a project with serious technical defects may be very popular in the market. However, this does not mean that the project was launched by blind men and elephants . On the contrary, many successful ICO projects have long-term precipitation and accumulation. Although there is no ICO, Bitcoin, as the most successful application of blockchain, is also based on the efforts of many geniuses including Chaum, Nick Szabo, Dai Wei, and developed by its developer Satoshi Nakamoto. It is not something that came up with a whim. The success of Bitcoin is a combination of chance and necessity.

For an ICO project, first of all, there should be a relatively reliable white paper with clear logic and practical operation, which should present a practical solution . The writing of open source code has a clear goal, and the personalized software written has clear market functions. Although the white paper is not the only criterion for judging whether a project is reliable or not, it does reflect the depth and accumulation of the founding team's understanding of the project.

2. The use of ICO project funds is authentic and transparent

The Draft Opinion mentioned that another important feature of illegal fundraising is "fictitious use of funds" . It can be said that this is a very important criterion for judging whether illegal fundraising has been established or not. If the funds raised by a project itself are not used for project development and continuous maintenance as stated in its published white paper, then it is either other fundraising activities under the guise of ICO, or it is pure fraud.
In ICO projects, investors give Bitcoin or other digital cryptocurrencies to the founding team, and the founding team gives tokens to investors. The founding team should use the funds in accordance with the white paper or other corresponding agreements or tacit understandings reached. If the founding team does not use the funds as agreed, it is at least a breach of contract. Therefore, the use of funds raised by ICO projects in a true and transparent manner is an important part of avoiding illegal fundraising.

3. ICO projects do not promise any returns when issuing tokens

The Draft Opinion mentioned that another important feature of illegal fundraising is "promises to repay principal and interest or to pay returns" . In ICO projects, whether the founding team issues digital cryptocurrencies through sales or mining, it does not need to promise any returns to investors. Once the tokens are issued, they do not belong to the founding team. The team only explains the prospects and development possibilities of the project to investors, and cannot actually promise returns. Therefore, if the ICO project promises returns, even if it is implied, this does not conform to the characteristics of blockchain applications.
The illegal fundraising of some projects under the banner of ICO is constantly reinforcing the perception and impression that the project will definitely bring hundreds, thousands or even higher returns to investors, which is fundamentally different from normal ICO projects.

4. ICO project investors have the corresponding risk tolerance

In fact, ICO project investment is a very risky project. Although many ICO projects on the market have generated high returns, this phenomenon has many reasons and does not reflect the high-risk characteristics of ICO projects. Someone once listed that before the success of Bitcoin, there were as many as hundreds of peer-to-peer digital cryptocurrency schemes that ultimately failed. The "Draft Opinion" mentioned that in the process of dealing with illegal fundraising, the relevant local people's governments should take effective measures to maintain social stability . If an ICO project absorbs funds from investors who are not risk-tolerant, then due to the high-risk characteristics of the ICO project, if the final project fails and the tokens held by investors are reduced to zero, then such investors are likely to be unable to withstand the blow and cause collective or malicious incidents. Therefore, it is very necessary to be cautious in financing in ICO projects.

5. Some suggestions for inclusive supervision of ICO projects

In order to strengthen the supervision of ICO projects, the author suggests that on the one hand, in terms of supervision, ICO projects can be required to be uniformly registered (the specific registration vehicle and registration method can be studied separately), and the ICO project founding team, project white paper, fund raising and use, and development progress should be disclosed to the public, relevant departments and investors accordingly to strengthen the supervision of ICO projects. On the other hand , traditional financing activities that are ICOs in form but in essence are the issuance of securities, bonds and other fundraising activities should be managed and handled in accordance with traditional investment and financing laws and regulations .

The author has previously discussed that ICO is a brand-new financing method (see "Why is ICO a brand-new financing method?"). The government has always maintained an attitude of inclusive supervision of ICO projects to encourage and support the development and application of blockchain technology. So what aspects need to be inclusive at present?

The first is the number of investors . Since ICO projects have the characteristics of an open source community, if the ICO develops a public chain, the more nodes the better. Since the tokens issued are used to pay for the accounting fees of the blockchain, if the scale is still limited to 200 people, it is inconsistent with the characteristics of the blockchain open source community. The author believes that for the financing of ICO projects, the 200- person rule should be implemented with inclusive supervision while adhering to the risk tolerance of investors, the project plan has a solid basis, and the use of project funds is real and transparent .

The second is the project release method . Since ICO projects are typical Internet technology application projects, and blockchain technology is an innovative upgrade of Internet technology, it may be difficult for ICO projects to avoid communication and promotion through the Internet, and it will also be out of its application scenario. Therefore, the author believes that when other factors are in compliance with regulations, ICO projects cannot be identified as illegal fundraising simply because they spread information through the Internet or instant messaging tools.