If anyone in the blockchain and cryptocurrency community was still wondering if regulators are aware of ICOs (initial coin offerings), we just got an answer. Israel’s chief financial watchdog gave a very hard review of everyone’s favorite new crowdfunding method in a speech to the financial industry in Tel Aviv about an hour ago.

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Prof. Shmuel Hauser, Head of the Israeli Securities Authority, said (translated by Finance Magnates):

“We have to address today what is happening with bitcoin, blockchain and ICOs that are challenging the current regulation around the world. It is here at the gates of the stock exchange. It is a new economy where the companies have no faces, and the investors have no faces. Our task is to get ready now in a proactive fashion before an event will occur that will hurt Israeli investors.

In a survey done by the ISA, over 60% of the public was exposed to digital investment offers promising phenomenal returns. The problem is that about 67% are seriously considering such investments without understanding them.

In this new world, whose spring is seen today, payment is done with virtual currencies. Let there be no doubt- bitcoin is not a passing phenomenon. Recently an ETF on bitcoin was offered that was not approved by the SEC. Regulators of the world are not ready yet. But we must understand and internalize that the day isn’t far away when derivatives on bitcoin will be offered and capital raised with digital money. Already today there are IPOs. These are IPOs with no prospectus. These are IPOs without control or knowledge of the base asset. These are IPOs without cost, supposedly. These are IPOs without credit risk, supposedly at least.

Gentlemen, this is not a passing phenomenon. It is here at the gates of the capital market. It is here at the gates of the stock exchange. Is it a widespread phenomenon, is it a phenomenon that requires the protection of the state? Regulators? In this new economy, there are no faces for investors and there are no faces for companies. And what happens in times of trouble? As we know, there are those that will want to use every available breach for unfair and illegitimate proposes. Does this new world require no regulator?

ICOs are one interesting example. It is a phenomenon that is developing very recently and must be addressed. ICOs of virtual currencies are a challenge to current global regulations. These IPOs where funds are raised via blockchain, bitcoin and similar cryptocurrency, for various projects, allow the bypassing of the supervision system for raising capital at the banks and at the stock exchange.

In an ICO campaign, a percentage of the ‘money’ is sold to investors in exchange for certain rights in the developing product, out of the expectation that the value of the currency will raise and can be traded. The ICO phenomenon is developing fast. The extent of the raised funds was tripled in the first half of 2017 alone. These IPOs deal with a currency that is not recognized as legal tender in most countries, and is not necessarily an equity, usually in a private way, but with properties that some very much reminiscent of stock IPOs. This raises the question, are these equities? If not, should the definition of equities be expanded? Should they be supervised as such, especially because of the fear of scams, and nameless people and projects? Or should they be classified as a pre-sale of the product that is being developed by the startup? One way or the other, it looks like ICOs are going to be a part of many investors’ activities, and are a challenge to all regulators around the world.

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The crowd funding is done via an appeal to the public, and if it is equities, while bypassing the rules of making a public offering. Recent examples, as published in the media a week ago, are: Israeli Bancor, which raised $153 million in three hours for a conversion protocol; Gnosis, which raised $12.5 million in ten minutes for building a perform for predicting events; Brave, which raised $35 million in 24 seconds for developing a browser; Aragon, which raised $25 million in 15 minutes for decentralizing companies; and more. The estimation is that in the last couple of months there have been about 20 ICOs every month.

From a regulator’s point of view, the question is whether equity laws that were written for a world of flesh and blood, are even set up to handle this digital phenomenon that has so many dimensions the law didn’t expect?

In today’s world, if we try to analyze ICOs with familiar terms, we can see that unlike stock IPOs, investors don’t acquire ownership of the firm, and definitely not in a firm that underwent an organized process of reporting to the public and presenting a prospectus before becoming public. In an ICO investors are buying digital money that was created and controlled by the founders of the firm, and is supposed to fund a future project. The investors are also not buying a financial instrument like a bond that promises them set payments. According to this analysis, we are not talking about issuing stocks or bonds. On the other hand this is a proposal which in essence is an offer for a passive financial investment to a large crowd of retail investors. These type of investments, and the built in fear that is attached to them, bring the situation closer in essence to an IPO, and might justify being-organized by the regulator.

And how does the public see it? A few months ago we had a survey in the world of unsupervised investments. Among other things, we found that 61% of the public has been exposed to an investment offer, through all mediums, and especially digital.

In the matter of unsupervised investments, respondents were asked the following two questions. The first was, what would be your response if you were offered a one-time investment in a real estate project with a guaranteed ROI of 15% for 5 years? The most surprising result was that only 20% said that they would reject the offer. Another surprising result is that 45% answered that they would decide after consulting with friends and relatives. Only 30% answered that they would consult with an investment advisor.

The second question was, if you were offered an immediate independent source of income by using a simple trader system without commissions with an opportunity for 70% returns in all market conditions, would you consider it? Only 20% said that such an offer would not be attractive to them. 67% thought that it was a fairly attractive offer. These findings are especially surprising considering the fact that most respondents that decided to invest before were disappointed with their investments.

These findings demonstrate the need to rethink, to exhibit a greater degree of paternalism, and by the same token, extend the definition of equities in general and ICOs specifically.

This innovative field will keep us busy for the near term. The task ahead of us is how to consider and how to get involved now proactively, before an event where Israeli investors will get hurt.”

This is not totally unexpected. In our recent interview with David Siegel, founder of the Pillar project, we talked about how you should build your token portfolio now as regulators will get involved soon.