And how projects can respond Introduction Although 2018 has seen many successful ICOs, with total capital raised having already , the market has changed significantly, and running a successful ICO is becoming more difficult. surpassed the 2017 total Part of this change is due to the evolving nature of investment, markets, and levels of scrutiny by ICO purchasers (which we’ll explain in our next article). Another key change surrounds the difficulty of raising funds from the global public at large due to regulatory risk. Investment from the ‘global public‘ In the early days of ICOs (/the DAO), the application of regulations to global token offers was unclear and/or untested, so the level of regulatory risk and compliance requirements was largely unknown (and in many cases, disregarded). In the minds of many prospective ICOs, regulation did little to hamper where (or from whom) they could raise money. This changed significantly throughout 2017. As we’ve written , regulators are increasingly responding to what they see as the risk of ‘unsophisticated retail investors’ (ie ordinary people) investing in ICOs — to regulators, ICOs are potentially the sort of high risk investments that most developed countries have extensive laws in place to protect potential ordinary people from. This view has been given weight by multiple scam ICOs and resulting media coverage. elsewhere A consequence of regulatory developments is that, whilst in early 2017 an ICO could essentially offer tokens to (and therefore access capital from) almost anyone, anywhere in the world, now accessing public capital is increasingly restricted. Whilst in many places, the exact position remains unknown, the risks of regulator attention, legal challenges, or other concerns can be high. Regulation can make very it difficult (at least directly) to access capital in some key markets (China, potential South Korea); and challenging from certain aspects in other mass markets (eg ordinary investors in the US and increasingly other Western countries) within a palatable level of risk. In many cases, lawyers appear to be advising against public offerings many jurisdictions and the risk of such public offerings is high, with regulators on ‘high alert’ for potentially non-compliant projects (both pre and post ICO). Potential Solutions In response, a number of potential solutions have arisen. STOs Security Token Offerings (STOs) are an increasingly common approach of treating tokens as legally-recognised securities, and following necessary regulatory compliance obligations that arise. STOs might be a way to lower a project’s regulatory risk profile by taking a more actively compliant approach, engaging with lawyers and regulators more deeply. However, the jurisdictional variation in exact compliance/legal requirements can limit the effectiveness of this approach in unlocking global public capital markets, whilst the timeframes and costs of compliance can be difficult. Whether this approach is consistent with the project’s objectives will vary. Ultimately, determining whether this approach is right for a project is a decision that needs to be made early on, so token consultants can design or amend a projects’ tokenisation model (and whitepapers and other materials) to try to be consistent with whether a security (STO) or utility token (ICO) approach is the objective. Accredited Investors Another approach is to rely on raising capital from more ‘conventional’ sources: accredited/sophisticated/institutional investors (eg HWN investors, VC/PE funds), for whom compliance requirements can be lower, regardless of the token’s status. In effect, the approach seeks to reduce regulatory risk by obviating many compliance requirements that would otherwise turn on whether the token is a security or utility token. A commercial challenge with such an approach often arises post raise. Projects that have relied solely on accredited investors for their ICO can struggle to obtain widespread usership and develop a strong community. Jurisdictions A key component to managing risk involves carefully planning where a project will offer and operate from. Different jurisdictions take different approaches to ICOs, and aligning participating jurisdictions with the project’s specific risk tolerance — balanced with its target funding areas — can be an important method of managing global risk for token offerings. Nevertheless, the reality is that the more jurisdictions involved, the greater the access to capital, so approaches that facilitate this are desirable. Conclusion As we’ve seen, high potential crypto projects are continuing to attract capital, though the need to assure investors that regulatory and governance risks are managed — and won’t derail a post ICO project with costly, time-consuming regulatory issues — is increasingly an expectation. Whilst there are several risk mitigation strategies that can be adopted, there is unfortunately no ‘silver bullet’ answer for all projects. A co-ordinated strategy, tailored to a projects specific profile and objectives is the best approach. Lupercal Capital’s Strategy Consulting team specialises in helping ICOs, STOs and other blockchain/crypto projects run successfully. In particular, we help navigate regulatory risk and design effective tokenisation models. If you’re thinking of an ICO or blockchain adoption, we’d love to hear from you — go to lupercalcapital.com , or email us at enquiries@lupercalcapital.com to learn more.

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