Initial coin offerings, or ICOs, have become a ubiquitous and much-discussed way for companies in the blockchain and digital currency space to fund themselves. To date, by some estimates, more than $3 billion has been raised in ICOs, outpacing all venture capital raised in the United States in 2017. The technology of the blockchain has the power to transform the business landscape for many industries, and to create vibrant new companies in the manner of the PC and internet revolutions. But the ICO as a funding mechanism, especially in what we call "Version 1.0," in which issuers have decided that their coins or tokens are not securities, regardless of the stage of development of the company and its blockchain network, raises serious questions under the securities and other laws, and will invite litigation as losses occur in the future for those who bought into ICOs. In fact, the first purported ICO class action appears to have been filed, against Tezos and its $232 million ICO closed in July 2017.
In this article, we examine the hypothetical case of one fictional entrepreneur who launched an ICO in early 2017 without treating the tokens as a security, and the potential outcomes and concerns she should have taken into account regarding securities, commodities, government enforcement, private litigation, and insurance. We are not attempting to predict the market for Bitcoin, Ether, or other digital currencies; rather, we are creating a scenario to illuminate legal issues.