ICOs are the issuance of digital company shares, also called crypto assets, coins or tokens. They are based on the blockchain technology, which allows the decentral handling of the purchase and the sale of digital assets. This technology enables start-ups at an early stage to access investors more easily. Investors purchase the tokens and expect them to gain value with the economic success of the start-up.

In contrast to the classic Initial Public Offering (IPO), which takes place in a highly regulated environment, ICOs are so far unregulated, except for a few special cases. While ICOs could make it easier for some smaller companies to raise capital, they also carry risks: Issuers are uncertain as to whether they are obliged to obtain a license for issuing tokens. Investors, on the other hand, find it difficult to assess how reputable and profitable their investment is. It also remains unclear how they would be able to access information about the success of their investment. This is particularly important because there are not only reputable start-ups with good chances of success in the market, but also dubious and fraudulent issuers who intent to harm investors and thereby endanger the reputation of ICOs as a useful financing instrument.

It is a shortfall of the the European Commission’s action plan that it remains too vague with respect to this point. A clear regulation could remedy these problems. ICOs are best promoted via a legal framework for token issuance and trading because investors will be more willing to invest their money if obligations of issuers and investor rights are clarified.

However, it must be kept in mind that the ICO issuers are start-ups that would be excessively burdened by high bureaucratic costs. Instead of the preparation of prospectuses and financial statements, it should be sufficient for them up to a certain ICO issuance volume to provide new and existing investors with online information. However, it is necessary to define minimum standards for the information to be disclosed. To this end, the Commission should assess to which extend its proposal for a crowdfunding regulation could be applied to ICOs.