One of the biggest trends in startup funding this year has been the ICO, or initial coin offering. It’s a weird and novel way for companies to crowdfund money by selling, essentially, their own “currency.” But there are concerns that much of the activity is being fueled by speculation that the value of the coins will rise, and that dealing in the offerings themselves — which until lately had gone unchecked — are tantamount to selling securities. As regulators to start to perk up and take notice, 2017’s wildest financial ride looks like it may be about to flatten out.

Companies "are not freaking out and they really, really should be," Emma Channing, general counsel at the Argon Group, a cryptocurrency advisory firm, told BuzzFeed News.

In an ICO, a startup sells “tokens” — its own form of cryptocurrency — usually in exchange for Bitcoin or ether, the two most mainstream cryptocurrencies. These tokens are typically used to access the company’s own services, or traded on token exchanges after (hopefully) rising in value. Some token buyers are enthusiasts for the startup who want early access to its products (for instance, a new file storage system or messaging system that isn’t even finished yet) and fund its development. Yet in this year’s hot ICO environment, it has become more likely that they are speculators who want to capture the token’s increase in value.

Legally, coin offerings exist in a gray area. Unlike going public, companies that ICO are not required by the Securities and Exchange Commission to disclose financial and business information; they instead write their own "white papers" to describe the purpose of the offering. Some of the startups are even registered overseas, in places like Switzerland, to avoid scrutiny.

The SEC only recently took notice of coin offerings after an Ethereum project, the “decentralized autonomous organization” (or the DAO), which had raised about $150 million worth of ether, collapsed last year when it was hacked and drained of $55 million of ether shortly after the sale closed, exposing the vulnerability of the new marketplace.

“Investors need the essential facts behind any investment opportunity so they can make fully informed decisions,” said William Hinman, SEC director of the Division of Corporation Finance. “Sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws."

“The market is a very broad and diverse place. There are people who should be very, very worried about the DAO report,” Argon’s Channing said.

Initial coin offerings have raised over $1.5 billion so far this year — and in June and July ICOs exceeded venture capital funding provided by angel and seed venture capital investors to total internet companies, according to Coin Schedule.

A big reason for the burst in interest in ICOs is that many holders of ether (a digital currency) are sitting on gains of over 4,000% this year, and there's only so much you can directly buy with it, said Alex Sunnarborg, a research analyst at the virtual currency news site CoinDesk.

So these cryptocurrency enthusiasts are blowing their virtual earnings on the new currencies, hoping to get in on the ground floor of companies built atop the technology that’s already made them (on paper) rich. While cashing out large amounts of ether can be cumbersome, putting digital riches back into ICOs gives ether and Bitcoin holders a chance to diversify their cryptocurrency holdings.

"A lot of these kind of profits through ether are what is really funding ICOs and making the ICO rounds so big," he said. "If ether hadn’t gone up so much, we might not have seen these ICOs raise so much now."

The new tokens investors receive in an ICO can be traded on exchanges, which means they can shoot up in price after their initial purchase, leading to what many observers say is rampant speculation.



"At least three-fourths of the funding going into blockchain projects is purely based on speculation," said Sunnarborg.