The document discusses the potential for initial coin offerings (ICOs) to become a mainstream financing mechanism for small and medium-sized enterprises (SMEs). It notes that while ICOs allow for faster and cheaper financing than traditional options like IPOs or venture capital, they currently pose significant risks to both issuers and investors due to a lack of regulation and investor protections. For ICOs to become more viable, the document argues that greater international regulatory coordination is needed to provide clarity and safeguards, while also ensuring disclosure standards and investor education on the risks involved.

1. The potential of Initial
Coin Offerings (ICOs)
for SME financing
26 October 2018

2. 2
 OECD project on ICOs for SMEs
 Examine the emergence of ICOs as a financing mechanism for SMEs
and evaluate its potential to address SME financing gaps, where
these exist
 Objective:
 Analyse the potential of ICOs as a mainstream SME financing tool
(i.e. for any small business)
 Examine the benefits and challenges of ICOs for SMEs/ investors
 Process and practical modalities
 Comparison to risk capital financing mechanisms: IPOs,
crowdfunding and venture capital
 Discuss policy implications for the financing of the real economy
 Regulation, taxonomy/classification and financial stability implications of
ICO activity are outside the scope of the report
 Avoid overlap with other IOs (FSB, IOSCO)
 Recognising IOSCO’s development of Support Framework on investor
protection for ICOs (tasked by the G20)
Background

3. ICO issuance levels
19
104 232 462 575
134
705
948 841
1,442
1,790
2,3822,158
726
1,061
5,499
5
13
18
24
35
16
43
51 50
78 75
63 64
69
63 60
0
10
20
30
40
50
60
70
80
90
100
0
1,000
2,000
3,000
4,000
5,000
6,000
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Gross Proceeds (USD million) Number of ICOs
19
104 232 462 575
134
705
948 841
1,442
1,790
1,532 1,308
726
1,061
1,299
0
1,000
2,000
3,000
4,000
5,000
6,000
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Pro-forma Gross Proceeds (USD million)
 Important levels of ICO
issuance persist
 Lower number of
larger-sized issuances
 Excluding the two
largest ICOs in 2018,
some normalisation in
ICO activity levels
 Pro-forma issuance
reached its peak in
Jan 2018
Notes: Pro-forma gross proceeds excluding the Telegram ICO (USD 1.7 bn raised in two rounds on February and March 2018) and EOS ICO (USD 4.2 bn closed in June 2018).
Source: Coindesk.
Adjusted ICO monthly issuance (excl. Telegram and EOS)
ICO monthly issuance
3

4. The ICO process
IPOICO
IPO team
(founders,
underwriters,
advisors)
Due diligence
(legal,
financial,tax)
Concept,
founding
team
Whitepaper
& technical
disclosure
Filling of
documents,
registration
Roadshow,
market
sounding
Order book
building
Pre-sale
(optional)
Marketing
Pricing &
share
allocation
Trading
Tradingupon listing
on secondary market
(not guaranteed)
Potentialseasoned
offering
Token
allocation
Distribution
of tokens
held as
reserves
Planning (12 – 18 months) Offering (6 – 9 months) Post-offering
Planning (2 - 4 months) Offering (1 – 2 months) Post-offering
 Lean and simple, flexible process
 Disintermediated  lower costs, efficiencies driven by DLT technology
 Direct access to unlimited pool of investors
 Speed of execution
4
IPO vs. ICO process

5. 5
Token rights
Token
Rights
Access to the
platform
Right to use the
product/ service
Voting
rights
Ownership??Payment
Right in future
profit sharing
Governance
rights
(vetting of new
entrants, approval
of changes
In code)

6. Benefits of ICOs
6

7. 7
The ICO process (cont’d)
Concept,
founding
team
Pre-sale
(optional)
Whitepaper
Technicalpaper
Terms & conditions
Marketing campaign
(socialmedia,
specialisedwebsites)
TokenIssuance
(receiptof funds &
distributionof tokens)
Listing of token in
trading platform
Platform building
Service/product
launch
!
Non-standardised,
Non-vetted disclosure
Information asymmetries
!Potential
conflicts of interest
Possibly not
incorporated,
At concept stage,
No skin-in-the-game
! !
Listing not guaranteed
Unregulated trading platforms
High volatility, counterparty risks
Systematic risk (correlation to BTC)
Operational risks (DLT-related)
Cyber risk
Potential misalignment of interests
!

8. 8
Subscribing to an ICO
Potential
Secondary
trading
Investor
Trading platform
ICO Issuer
Investor’s
Crypto-wallet
SUBSCRIBER CONSIDERATIONS
 Valuation and pricing (ICOs do not fit
traditional investment paradigm)
 Accounting and reporting
 Dilution, token inflation
 Structuring & conflicts of interest
o allocation of free tokens to founders
o absence of lock-up & misalignment of
interests
 Duality of token function &
value allocation
 Corporate governance
 Technical skills

9. 9
Issuing an ICO
Potential
Secondary
trading
Investor
Trading platform
ICO Issuer
Investor’s
Crypto-wallet
SME-RELATED CONSIDERATIONS
 Structuring & tokenomics
 pre-define financing needs before
project launch
 Inability to exercise pricing strategy when
token is traded
 Duality of token function and dichotomy in
value attribution
 e.g. between tokenholders and
traditional equityholders
 Extreme volatility
 Systematic risk
 Technical skills,
operational risks

10. Legal and regulatory uncertainty
 ICO risks for SME issuers and investors are mainly linked to the uncertainty of the
applicable regulatory framework for ICOs and crypto-asset markets
10

11. Investor protection
 The lack of financial consumer protection safeguards exposes investors and SMEs
to significant risks
11

12. Structuring-related issues
 Limitations in the structuring and conflicts of interest add to the risks of ICOs.
12

13. Corporate Governance, operational
and business-related issues
13
 Lack of formal corporate governance, operational and business risks of blockchain-
based decentralised issuances are additional risks of ICOs.
13

14. 14
Can ICOs become a mainstream financing mechanism?
 Under specific caveats and depending on the conditions of issuance,
ICOs can facilitate faster and cheaper financing for DLT-based SMEs
BUT
 ICOs not the right solution for every project
 Differentiation between blockchain-enabled projects/products/services and
non-decentralised business models
 Solid business rationale for the use of the blockchain and decentralized
business model, so as to benefit from network effects
 Creation and monetisation of network effects, together with efficiency
gains, the comparative advantages of ICOs vs. traditional risk finance
Preliminary conclusions (1/2)

15. 15
 Clarity in the regulatory and supervisory framework applying to ICOs a
stepping stone to the safer use of token issuance
 Cooperation at the international level for a coordinated global approach
that will prevent regulatory arbitrage
 Role for policymakers in creating necessary conditions to develop ICOs
in a safe and fair way
 Enhanced investor protection for retail ICO subscribers
 Efforts for greater awareness of risks by retail investors, financial education
 Standardised disclosure requirements
 AML/CFT requirements
 Proportionality ?
Preliminary conclusions (2/2)

16. www.oecd.org/finance/SME-financing.htm