ICO - a chance for the initial financing of your enterprise

ICO - šansa za početno finansiranje Vašeg biznisa

The Law on Digital Assets of the Republic of Serbia came into force on 29.06.2021, making Serbia one of the pioneers in regulating the field of cryptocurrencies and digital tokens (e.g. NFT). By introducing rules into the crypto world, it brings legal certainty to all investors and startups, not to experience the fate of Ripple and the cryptocurrency XRP, which is waging a long legal battle with the United States Securities and Exchange Commission (SEC). Although the lack of regulation sometimes may seem to be an advantage, the example of Ripple has shown that lack of regulation does not apply to serious crypto projects and startups that invest large sums in their idea. The existence of the Law set the rules of the game for the development of the idea. However, in addition to startups, any entrepreneur or legal entity, regardless of whether it is a domestic or foreign entity, can issue a digital token in Serbia. Therefore, this right has a wider application. It is the estimate of the World Economic Forum, McKinsey and Deloitte that, by the year 2027, at least 10% of the world's GDP will be tokenized or around 24 trillion USD. Digital assets can be divided into 3 basic groups: 1) cryptocurrencies, 2) investment tokens, 3) "utility" tokens. Through a series of blogs, Law Office Pekić will try to point out to entities the importance of this topic, and how it can help them develop their business.

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What is the initial coin offering (ICO)?

The initial offer of digital assets was created as a counterpart to the initial public offering, which marks the beginning of the issuance of shares of companies on a stock exchange (IPO - initial public offering). The process of the initial public offering is more complex than the initial coin offering, which is logical because, through the initial public offering, company shares are issued, and the shares are securities. Through the process of issuing a digital token, shares in the company are not issued, nor ownership of the token implies ownership of the company with the right to dividends, as shares imply. Through the ICO, buyers of such assets exercise the right to certain services from the issuer of the token or other monetary rights. Globally, the ICO skyrocketed during 2017 and 2018, when Block One also raised $ 4.1 billion through an ICO. In general, it is asserted that over $ 50 billion were raised so far through the ICOs, which confirms the potential of digital assets.

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But why would a business issue a digital token?

Let's say you have an idea of how to improve your business. You have a plan and you are certain of success, but, as it usually happens, you do not have initial capital, and you are not in a position to take a loan from a bank. Issuing digital tokens is an alternative way of financing. When you take a bank loan, you pay high-interest rates, loan processing costs, you take on conversion rate risk in the EUR-to-RSD exchange rate, collect numerous documents, put your real estate as collateral and other possible collateral, to repay much more at the end of the loan period than what you initially borrowed. Instead of taking a loan from a bank, you can issue a digital token, which enables its users, token buyers, to benefit financially or acquire the right to claim certain services from you. If you have a project in mind, e.g. to buy a machine that will improve and enhance your business, accelerate development, you can finance your purchase by issuing a digital token. The content of the token is the right of its holder (buyer) to claim from you a certain amount of money or service. Your customers who have confidence in your work, reputation, and financials, can buy such a token and exercise the rights from the token. Instead of the bank making money on your idea and an innovative business venture, such a benefit can be realized by your most loyal clients who have been with you since the beginning (early adopters).

Who would buy a digital token?

A specific example from practice is startup GameCredits from the gaming industry and their digital token MGO. Potential holders of digital tokens are offered the following rights: 1) coupon reward discounts when purchasing content in the store, 2) free entrance to VIP gaming tournaments with cash prizes payable outside of games, 3) private beta testing of newly released games in the store. Clearly, this startup is narrowly focused on the gaming industry as a specific niche. For people who are extremely interested in these games, the purchase of the offered digital token brings exceptional value, due to the utility that the token provides. For someone who is not very interested in the games that the startup offers, these tokens will have no value.

However, for those first introduced to the utility tokens, let's present a more basic instance than in-game tokens. Let's say you have an idea for a website to share videos or movies (such as Netflix), and you need seed capital. You can issue digital tokens, and with each token, customers are entitled to 10 hours of streaming your video content (movies). Or if you want to open a laundry store with 10 washing machines, which would allow token buyers to exercise the right to use laundry services in a certain unit of measure for each token, e.g. 1 token = 10 wash baskets, where the size of the basket would be predetermined or permanent discount of 20% for holders of the token. These examples represent a huge simplification in order to truly understand the possibilities of using this form of financing. Certainly, issuing tokens will be more useful for innovative activities (startups), mainly because of the growth potential of such companies.

Photo by Ferhat Deniz Fors from Unsplash

Crucial point is that the digital token, issued in accordance with the Law of the Republic of Serbia, can be sold to anyone in the world. Tokens are issued on a blockchain, so the buyer does not need to be from Serbia, because tokens are sold online.

This blog is for informational purposes only and does not constitute legal service, as each situation requires a commitment to the specific circumstances of an individual case, which may be different from others.

For legal assistance, tailored to your needs, contact the Law Office Pekić at: [email protected]

Author: attorney at law Stefan Pekić

Credits: Cover photo by Kanchanara Ow from Unsplash