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How to Design an Effective Initial Coin Offering

The initial coin offering, or ICO, is catching on as a new way for blockchain-based startups to raise capital — without having to go through the tougher vetting required by traditional lenders or having the track record needed for IPOs. As a new type of crowdfunding, ICOs let companies raise money faster and with less red tape so they can get started on building their businesses more quickly. But it also comes with caveats, as poorly designed ICOs can fail to take off. So how can firms ensure they will be maximizing their ICOs’ chances of success?

New Wharton research shows that getting the initial coin offering design structure right is a key ingredient for success, according to the paper, “Inventory, Speculators, and Initial Coin Offerings,” by Wharton professors Gerry Tsoukalas and Serguei Netessine as well as doctoral candidate Jingxing (Rowena) Gan.

It is the first paper to look at initial coin offering design for companies developing physical products, under demand uncertainty and in the presence of strategic investors. However, they found that even the best design has flaws. “ICOs have the advantage of being a low-risk means of financing for firms,” they said, “but this comes at a cost of lower production quantity, lower profit and limited flexibility in terms of product margin.”

So why do an initial coin offering at all? Startups that cannot get access to traditional financing could still get capital through ICOs if enough people back their business idea. And investors — or more accurately, speculators — can come from anywhere and face fewer restrictions. Also, unlike crowdfunding, startups don’t have to go through a platform like Kickstarter where if they don’t meet their fundraising goal they get no money at all. With an initial coin offering, the company can keep any amount raised. ICOs are largely unregulated as well, so firms have to deal with fewer bureaucracies.

But it makes ICOs riskier investments because of their high failure rate. According to the researchers, nearly half of all ICOs in 2017 and 2018 “failed to raise any money at all” and 76% did not even meet their minimum funding goal. Moreover, only 44% of projects remained active on social media five months after the initial coin offering. As for scams, 271 out of 1,450 ICO cases were “susceptible to plagiarism or fraud,” the researchers said, citing an investigation by The Wall Street Journal into offerings aimed at an English-speaking audience from 2014 until May 2018. “The profit-seeking yet ill-informed investors can become easy prey and have claimed losses up to $273 million,” they wrote.

Nearly half of all ICOs in 2017 and 2018 “failed to raise any money at all” and 76% did not even meet their minimum funding goal.

“Fundraising through an ICO is not regulated, which opens possibilities for all kinds of inappropriate behavior by fundraisers. Indeed, recent data demonstrates that in a majority of cases the company ceases activity without delivering the product or service,” Tsoukalas said. “Our research shows that, despite lack of regulation, moral hazard issues in ICOs can be mitigated when the initial coin offering itself is properly designed. In particular, we show how firms can determine the optimal number and type of tokens to issue, how to price them, and how to manage product inventory, when facing uncertain future demand.”

Despite its design shortcomings, ICOs remain alluring. Since taking off in 2017, the initial coin offering market has topped $22 billion in 2018, challenging the traditional ways of raising capital, the authors said. In the second quarter of 2018 alone, ICOs raised $9 billion — equal to 56% of the U.S. IPO market, or 39% of U.S. venture capital. With ICOs gaining in popularity, the authors set out to design the ideal structure from an operations standpoint and answer the following questions: What type and how many tokens should be issued? How should they be priced? How do these choices affect inventory decisions and odds of success? And how are they different from other types of financing?

How ICOs Work

The typical initial coin offering process begins with a startup publishing a white paper explaining the business idea it wants to fund with the proceeds from the offering. It will provide the number and price of digital tokens it plans to sell, the sales period, the sales cap, and other salient details. The startup may or may not have a prototype product to show potential buyers, the authors said.

Then the startup issues “platform-specific [digital] tokens” for sale to speculators, the researchers said. These tokens can be exchanged for future products or services (in the case of utility tokens) or alternatively they give holders the right to share in future profits (in the case of equity tokens). Buyers pay for the tokens using fiat money — or more likely, cryptocurrencies — and they may hold the tokens or trade them like a stock in the secondary market. There are more than 1,000 different types of digital tokens in circulation, according to CNBC.

For example, Honeypod, which makes an internet hub that protects user privacy, said in its white paper that it planned to sell 40 million tokens out of the 200 million it created, for a price of 5 cents apiece to the public. It expects to use the funds to make 50,000 devices in 12 months. The offering closed in April. Another one is Sirin Labs, which raised $150 million from a 2017 ICO to build a cryptocurrency-friendly smartphone. Backers who bought Sirin tokens could exchange them for its products, or trade them. But while Sirin was able to make its smartphone, demand “fell well short of expectations,” the authors wrote.

In the Wharton research paper, the authors only considered ICOs that offered products, not services, for their tokens. They analyzed both utility and equity tokens and identified three ICO participants: the company, speculators and customers who buy the product after it is made. They also looked at three stages — the ICO fundraising, production and market phases. In the first phase, the firm sets the number of tokens, sales cap, and token price, and conducts the first round of token sales (ICO).

Next, the firm makes decisions about production despite not knowing consumer demand. Finally, the product launches and the company gets a sense of actual market demand. The firm sells its remaining tokens jointly with other token owners (speculators) to the customers through a secondary market. The customers then purchase the firm’s products using the tokens.

The startup must be able to price the product at more than double the cost to make it, or else the venture will fail.

Their goal was to find the optimal initial coin offering design, price, token cap and production quantity to maximize sales and profits. “Are ICOs a viable means for product-based firms to raise capital? What drives their failure or success?” asked Gan. “What is the theoretically optimal way to design ICOs in a largely unregulated market environment?” Their key finding: “Despite rampant moral hazard such as risk of cash diversion and failure of the company to manufacture, both product-based utility and equity ICOs can be successful under the right conditions.” However, a crucial component is the existence of a secondary market where holders can trade their tokens.

The Successful ICO

What does a successful initial coin offering design look like? For utility tokens, the startup must be able to price the product at more than double the cost to make it, or else the venture will fail, the authors said. So if the cost of making a widget is $1, then the retail price should be at least $2.01. If the startup cannot price it at $2.01 or higher because it doesn’t think people will pay that amount, or competitors are cheaper, then the ICO will not be successful.

The authors compared this finding to that of a firm launching a product it finances itself, without having an accurate sense of market demand. In this case, the ‘self-financed’ firm just has to make sure it prices the product above the cost for the business to succeed; it doesn’t have to charge more than double the production cost as with ICOs. As such, “ICOs may be best suited for products with relatively high willingness-to-pay,” they said.

There are other drawbacks to utility-token ICOs compared to self-financed firms: They tend to produce fewer products and generate less profit. Their results show that the ICO startup produces up to 40% less than the self-financed firm and earns up to 50% less in profits. However, they said, “these gaps shrink when the market is bigger, more stable” or consumers are willing to pay more for the product. But ICOs have a big perk: Even if there is low demand for a product, losses are primarily borne by the investors. For self-financed firms, if they overestimate demand, they will have to bear the risk of losses themselves.

ICO firms should reserve more than half of the tokens for the third, or market, stage.

Another finding is that ICO firms should reserve more than half of the tokens for the third, or market, stage. If it sold more than 50% of the tokens in the fundraising stage, the startup will have given away more revenue-sharing rights than was needed. It also will end up with idle funds not used for production. “As a result, the firm produces less and collects less money,” they said. “The decrease in money raised has a bigger effect on the firms’ final wealth, which results in sub-optimal profit.”

The situation is a little different for equity tokens: There is less probability that the startup will run away with the money it raised instead of making the product. “As long as the firm does not sell out all the tokens during the ICO … it always produces some product if it raises money,” the paper said. That’s because token holders act more like shareholders who share in the future profit.

As such, “the firm’s incentives are better aligned with speculators’, making the firm less likely to divert cash from funds raised, to its own pocket.” However, for an equity token offering to be successful, the product’s price also must be more than twice the cost of production — similar to utility tokens. Importantly, this result holds even in the absence of additional regulations from which equity token holders often benefit.

Practical Implications

Their findings have several practical applications for ICOs. “With a capped ICO, the firm needs to set a wise ICO sales cap, which determines the fraction of all tokens that are sold during the ICO,” Netessine said. “The cap should be high enough to keep the investors optimistic about the token’s future value. At the same time, the cap should not be too high — the firm needs to save a substantial fraction of the tokens for secondary market trading to retain its revenue and profit-sharing rights.”

Netessine added that “products with higher price-cost ratio have better chances of being successfully financed through ICOs. High product margins effectively act as a deterrent to moral hazard,” such as fraud, cash diversion, and the like. “For firms planning to produce a physical product, ICOs with equity tokens perform better, or closer to first-best [optimal] outcomes, than those with utility tokens, all other things being equal,” he continued.

Startups that issue equity tokens do come closer to achieving first-best than utility-token firms. “Most ICOs, especially early on, issued utility tokens directly tied to the firm’s future products. This can be thought of as a form of revenue sharing: Selling more products increases the value of tokens, independent of the cost of the product,” Tsoukalas said. “Equity tokens, on the other hand, offer profit-sharing, akin to how traditional IPOs work. That is, the firm and investors share not just revenues, but also the costs. We show that profit-sharing in the context of ICOs better aligns incentives between the firm and its investors, and hence equity token issuance can lead to better outcomes.”

“We find that issuing equity tokens incentivizes the firm to produce more products.”

Overall, the authors found that equity-token firms have the potential to perform almost as well as a self-financed firm. “We find that issuing equity tokens incentivizes the firm to produce more products,” all other things being equal, they wrote. Moreover, good market conditions encourage the equity-token firm to push up production, unlike the case with utility-token startups. “This suggests that the first-best [performance of a self-financed firm] is almost achievable with equity tokens.”

The authors did find other interesting results. “The fact that equity tokens outperform utility tokens is intuitive, but nonetheless went counter to the fact that in the early days, most ICOs were using utility–based tokens,” Gan said. “Interestingly, recently there has been an increasing shift towards equity tokens in the industry, which is consistent with our results. Another interesting, and perhaps subtler, result, is that investor over-optimism in the ICO can make moral hazard issues worse. In particular, given the unregulated environment, when excess funds are raised, the firm has greater incentive to divert cash, and in some cases, even abandon production altogether.”

Looking ahead, the authors said there are opportunities to extend their research on ICOs to answer the following questions: To what extent will ICOs disrupt entrepreneurial financing? Are they sustainable for the long-term? And under what conditions do they replace or complement more traditional financing sources such as crowdfunding or venture capital? Future areas of exploration include token resale and inflation control; looking at the use of the funds in areas such as marketing and HR; diving into factors affecting the customer’s willingness to pay and demand, including network effects; how an initial coin offering informs future demand, and others.

Source: Initial Coin Offering Search Results
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Kik shuts down core messaging app as it battles the SEC over initial coin offering

Troubled startup Kik Interactive Inc. is shutting down its core messaging service as it battles the U.S. Securities and Exchange Commission over its $98 million initial coin offering in 2017.

The SEC sued Kik over its Kin token raise in June, claiming that the company illegally sold the tokens to U.S. investors without registering the offer and sale as required by U.S. securities law. Even before the lawsuit was filed, Kik argued that despite the ICO being linked by the company at launch to assisting it in building out its messaging app, Kin was strictly a currency and hence does not require registration.

Fighting the SEC in court does not come cheap, so the company has decided to shut down its messaging service, focusing its resources on its battle with the SEC.

“While we are ready to take on the SEC in court, we underestimated the tactics they would employ,” Kik founder Ted Livingston wrote on Medium. “How they would take our quotes out of context to manipulate the public to view us as bad actors. How they would pressure exchanges not to list Kin. And how they would draw out a long and expensive process to drain our resources.”

As part of the shutdown, Kik has laid off 70 employees, reducing its headcount to 19 core developers. Kik and Kin remain, even if the company’s messaging app is no longer.

According to Livingston, Kin is now used by “millions of people in dozens of independent apps. While the SEC might be able to push us around, taking on the broader Kin Ecosystem will be a much bigger fight. And the Ecosystem is close to adding a lot more firepower.”

Kik is not alone in fighting the SEC over allegedly unregistered securities offerings marketed as ICOs. Last week, the SEC sued ICOBox, a company that helps other companies launch ICOs, for breaching securities law in both raising money allegedly in an illegal way in its own ICO as well as acting as an unregistered broker. The SEC is also pursuing Veritaseum through the courts, while other cases, such as CarrierEQ Inc. and Paragon Coin Inc., were settled out of court.

Image: Kik

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Source: Initial Coin Offering Search Results
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Kik shuts down core messaging app as at battles the SEC over its initial coin offering

Troubled startup Kik Interactive Inc. is shutting down its core messaging service as it battles the U.S. Securities and Exchange Commission over its $98 million initial coin offering in 2017.

The SEC sued Kik over its Kin token raise in June, claiming that the company illegally sold the tokens to U.S. investors without registering the offer and sale as required by U.S. securities law. Even before the lawsuit was filed, Kik argued that despite the ICO being linked by the company at launch to assisting it in building out its messaging app, Kin was strictly a currency and hence does not require registration.

Fighting the SEC in court does not come cheap, so the company has decided to shut down its messaging service, focusing its resources on its battle with the SEC.

“While we are ready to take on the SEC in court, we underestimated the tactics they would employ,” Kik founder Ted Livingston wrote on Medium. “How they would take our quotes out of context to manipulate the public to view us as bad actors. How they would pressure exchanges not to list Kin. And how they would draw out a long and expensive process to drain our resources.”

As part of the shutdown, Kik has laid off 70 employees, reducing its headcount to 19 core developers. Kik and Kin remain, even if the company’s messaging app is no longer.

According to Livingston, Kin is now used by “millions of people in dozens of independent apps. While the SEC might be able to push us around, taking on the broader Kin Ecosystem will be a much bigger fight. And the Ecosystem is close to adding a lot more firepower.”

Kik is not alone in fighting the SEC over allegedly unregistered securities offerings marketed as ICOs. Last week, the SEC sued ICOBox, a company that helps other companies launch ICOs, for breaching securities law in both raising money allegedly in an illegal way in its own ICO as well as acting as an unregistered broker. The SEC is also pursuing Veritaseum through the courts, while other cases, such as CarrierEQ Inc. and Paragon Coin Inc., were settled out of court.

Image: Kik

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… We’d like to tell you about our mission and how you can help us fulfill it. SiliconANGLE Media Inc.’s business model is based on the intrinsic value of the content, not advertising. Unlike many online publications, we don’t have a paywall or run banner advertising, because we want to keep our journalism open, without influence or the need to chase traffic.The journalism, reporting and commentary on SiliconANGLE — along with live, unscripted video from our Silicon Valley studio and globe-trotting video teams at theCUBE — take a lot of hard work, time and money. Keeping the quality high requires the support of sponsors who are aligned with our vision of ad-free journalism content.

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Source: Initial Coin Offering Search Results
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Blockstack raises $23M in historic initial coin offering endorsed by the SEC

Blockstack PBC, a startup that has built a blockchain-based network for decentralized apps, Tuesday said it has raised $23 million in an initial coin offering historic as the first token sale to be endorsed by the U.S. Securities and Exchange Commission.

Approval for Blackstack’s ICO was granted under Regulation A+, established under the Jumpstart Our Business Startups Act, that allows for companies to raise up to $50 million in an alternative way to an initial public offering.

According to the company, thousands of retail investors in the U.S. participated in the ICO along with investors in Asia who were also able to participate.

“Our goals for working with regulators in the States were twofold,” Muneeb Ali, chief executive officer of Blockstack said in a statement. “Primarily, we wanted to reach more retail investors who can be users of our network and have a financial stake in the success of our ecosystem. Secondly, we identified Asia as a priority market, and our SEC qualification added weight to our strategic move toward Asia.”

Blockstack isn’t new to raising money, having already gone down the ICO path before when it raised $47 million from accredited investors in a 2017 ICO under Regulation D of the Securities Act of 1933. The company has also previously raised venture capital funding from Union Square Ventures, Y Combinator, Lux Capital, Digital Currency Group and Naval Ravikant.

Tokens sold in the upcoming ICO will be distributed to investors within 30 days.

The company continues to grow, now reporting an additional 4,500 contributors to its Stacks ecosystem since July. The company offers a Dapps platform that is pitched as allowing users to be in control of their data and logins.

Although Blockstack’s offering isn’t that much different from other blockchain-based Dapps companies, it does continue to impress, not only through its fundraising efforts but the fact that it did so legally with SEC approval. ICOs are not as popular as they were in 2017, but Blockstack has now set legal precedent as to how they can be undertaken legally.

Image: Blockstack

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Source: Initial Coin Offering Search Results
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SEC Settles with Blockchain based Health Care Platform SimplyVital Health in Regards to Initial Coin Offering

The Securities and Exchange Commission (SEC) filed an Administrative Proceeding earlier this week regarding an initial coin offering (ICO) affiliated with SimplyVital Health – a company that pursued an ICO in late 2017 and early 2018. The SEC claims that SimplyVital sold unregistered securities. SimplyVital apparently sold “Health Cash” tokens (HLTH) in a crowdfunding round. The plan was to create 200 million HLTH tokens with a presale offering 40 million tokens to investors in a SAFT.

The SEC has now settled with the company.

A document posted on the SimplyVital Health website states the settlement with the SEC now allows management to “refocus on developing blockchain-based solutions to emerging value-based healthcare programs.”

CEO Kat Kuzmeskas stated:

“We are pleased to put this matter behind us and are looking forward to the next stage in SVH’s evolution. Recently, SVH launched its “sana” services design with the goal of enabling physicians participating in the Centers for Medicare and Medicaid Services value-based care program to provide improved care while minimizing financial penalties.”

According to the SEC filing:

In total, from September 25, 2017, to April 3, 2018, SimplyVital raised more than 15,200 ETH (equivalent to approximately $6.3 million USD as of April 3, 2018) from 52 individuals or ICO pools who invested through the company’s pre-sale. Of the more than 15,200 ETH raised, at least 13,800 ETH (more than $5.2 million USD) came from purchasers with whom the company had not taken reasonable steps to verify accredited investor status.”

In January of 2019, SimplyVital announced it would not issue the HLTH tokens and all funds would be returned to investors. This decision came following outreach from the SEC staff.

The SEC reports that substantially all of SimplyVital’s assets have been returned to investors.

Importantly, the SEC has decided not to impose a civil penalty, in light of the actions taken by the firm.

This is not the first time the SEC has pursued an enforcement action by an ICO issuer with many prior settlements including a financial penalty and, in some cases, a requirement to file registration statements – a costly pursuit.

It is interesting to note the relatively mild actions by the SEC for a post- DAO report offering.

The seminal DAO report has been considered a line in the sand for ICO issuers with the Commission mainly pursuing post-DAO offerings or blatant acts of fraud. The DAO report was published by the SEC on July 25, 2017.

This approach by the SEC Enforcement Division may encourage other ICO issuers to proactively contact the Commission and possibly settle on similar terms.

The US ICO industry has largely accepted that almost all token offerings are securities and thus must adhere to existing securities law. ICOs have morphed into security token offerings (STOs) filed under one of three securities exemptions (Reg A+, Reg D, Reg CF). Some industry participants hope that Congress will take legislative action to create a safe harbor for utility token offerings similar to what is occurring in other global jurisdictions.

Several digital asset issuers have received No-Action letters regarding the issuance of a digital asset following direct communication with SEC staff. Most recently, Pocketful of Quarters received a No-Action Letter for the issuance of a token which was not deemed to be a security.


SEC v. SimplyVital Health ICO 33-10671


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Source: Initial Coin Offering Search Results
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SEC obtains restraining order against firm that raised $14.8M in initial coin offering

The U.S. Securities and Exchange Commission has obtained a temporary restraining order against Veritaseum, which raised $14.8 million in an initial coin offering in 2017, and its founder Reggie Middleton.

The SEC claimed in an emergency filing Monday with the U.S. District Court for the Eastern District of New York that Middleton, through Veritaseum Inc. and Veritaseum LLC, illegally raised funds via the sale of unregistered securities.

Since ruling that coins or tokens offered in ICOs could be securities in 2017, the SEC further clarified its stance in April via its “Framework for ‘Investment Contract’ Analysis of Digital Assets.” That framework defines factors the SEC considers as to whether an ICO is a security include an expectation of profit, whether the token relates to the achievement of a future product and whether the ICO is creating or supporting a market for a digital asset.

In the case of Veritaseum, the SEC claims Middleton and his companies made “material misrepresentations and omissions about the unregistered securities”and that his companies “knowingly misled investors about their prior business venture.”

According to the lawsuit, Middleton pitched VERI tokens, the tokens offered in the Veritaseum ICOs as software, even going as far as calling them gift cards — thus making the offering illegal. “There was no registration statement filed or in effect for the offers and sales of VERI, and no exemption from registration applied,” the lawsuit noted.

The illegal activity does not stop there. The SEC also alleges that Middleton was involved in a “pump-and-dump” scheme on an unnamed exchange, artificially inflating the price of VERI tokens by 315% in the process.

The temporary restraining order prevents both Middleton and Veritaseum from selling any funds from its ICO, but just how much of those funds are left is another question. Veritaseum was last in the news in July 2017 when $8.4 million in tokens offered by the company in its ICO was allegedly stolen by hackers. “Allegedly” is the key term here, since it was noted at the time that the hackers sold the stolen tokens on the open market to raise funds in actual Ethereum tokens.

The market responded to the lawsuit as would be expected. VERI tokens dropped almost 53%, to $6.94. The decline in the popularity of the token is not new, however, since its price peaked at $474.09 in January 2018, according to figures from Coinmarketcap.

Image: Veritaseum

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Source: Initial Coin Offering Search Results
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Norwegian Air adds 2 more Argentina destinations

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Source: ICO Inc News
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BA-owner IAG says well positioned for Brexit fallout



Friday, 2 Aug 2019 05:16am EDT 

Aug 2 (Reuters) – British Airways owner IAG ::CEO WILLIE WALSH SAYS GROUP IS VERY WELL POSITIONED IN CASE OF A HARD BREXIT DUE TO FLEXBILITY; CURRENTLY PLANNING ON A ‘SENSIBLE BREXIT’.SAYS TRANSATLANTIC PREMIUM ‘REALLY GOOD’; PREMIUM SEAT SALES PERFORMING VERY WELL.SAYS CAN’T PUT A FIGURE ON COST OF POSSIBLE BA INDUSTRIAL ACTION; SAYS OTHER PARTS OF IAG WOULD ‘TAKE ADVANTAGE OF UNFORTUNATE SITUATION’.SAYS I DON’T BELIEVE ALL AIRLINES OPERATING TODAY WILL BE OPERATING IN A YEAR’S TIME; IAG IN A POSITION TO TAKE ADVANTAGE.SAYS SLOWING GROWTH IN VUELING THIS SUMMER .SPEAKING TO ANALYSTS ON CONFERENCE CALL. 

Source: ICO Inc News
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Blockstack becomes first company to get SEC approval for an initial coin offering

Reports of dubious initial coin offerings targeted by the U.S. Securities and Exchange Commission are a dime a dozen, but a New York City-based company seeking to raise money in a token sale is making headlines for the right reason: It’s the first company to gain SEC approval for an ICO.

Blockstack PBC, a startup that has built a blockchain-based network for decentralized apps, obtained approval from the SEC on Wednesday for its proposed $28 million ICO, according to The Wall Street Journal. Approval was granted under Regulation A+, a regulation established under the Jumpstart Our Business Startups Act that allows for companies to raise up to $50 million in an alternative way to an initial public offering.

The unique feature of the approval is that it allows the general public to invest. Other companies in the past, without having specifically gained approval from the SEC, have undertaken ICOs under Regulation D, a regulation that allows private offerings such as ICOs but limited to accredited investors.

Approval from the SEC did not come cheap for Blockstack. Founder Muneeb Ali told the Journal that they spent $2 million to get approval for their ICO.

Blockstack comes into its new ICO having already gone down the ICO path before, raising $47 million from accredited investors in a 2017 ICO under Regulation D, according to CoinDesk. The company has also previously raised about $5 million venture capital funding.

The company itself appears to be promising, though its pitch isn’t different from dozens of other blockchain-based companies offering a Dapps platform to raise money. Blockstack said it now hosts more than 165 applications on its decentralized network, a healthy number.

The ICO will offer Stacks tokens that can be used to register digital assets such as domain names, write and enact smart contracts and process transaction fees on its network. The new Blockstack ICO starts Thursday at 11 a.m. EDT.

Image: Blockstack

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Source: Initial Coin Offering Search Results
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Fitch Ratings Says British Airways Fine Highlights Global Airline Cyber Risk

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