Conducting an Initial Coin Offering: Costs and Considerations
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The document discusses the costs and considerations of conducting an Initial Coin Offering (ICO). It notes that there are significant expenses associated with an ICO beyond just the direct offering costs, including ensuring corporate and financial readiness, establishing governance and internal controls, hiring advisors and specialists, and investing in technology infrastructure. Specifically, the document highlights that legal, accounting, and technology support are crucial areas that require advisors and compliance in order to minimize risks and costs when undertaking an ICO.
Conducting an Initial Coin Offering: Costs and Considerations
- 1. Costs and Considerations of an ICO: A Compliance Perspective July 2017 Conducing an Initial Coin Offering (ICO) is the process of taking your venture through the steps of: • Gathering the necessary financial, marketing, and business information; • Determining the optimal tax and legal structure; • Filing applicable forms with regulators, such as the Securities and Exchange Commission, when seeking appropriate exemptions, such as Regulation D and Regulation S exemptions; and • Marketing the business and selling the tokens/coins to potential purchasers. The ICO process continues until purchasers receive the value for their tokens. Conducting an ICO is the process of transforming the organization so that it can operate publicly with accountability and transparency. Among the many tasks involved are: • Upgrading, sustaining, or enhancing financial reporting capabilities; • Creating an investor relations function; and • Meeting the governance, reporting, and internal procedures. A comprehensive understanding of the costs involved with an ICO includes the costs associated with both taking the ICO to the public and then delivering on the ICO post-offering. Timeline of the ICO Process There are many different costs associated with an ICO. It is important to understand the nuances and unique complexities that companies face during the ICO process. While offering costs vary, as discussed below, a well- prepared company is better able to mitigate the additional expenses and time commitments that could push the ICO process off course. Offering costs of an ICO correlate positively with a company’s revenue. In particular, legal and accounting costs, areas where larger companies or larger offerings may face additional complexities in preparing for an ICO, increase significantly for larger companies or larger offering. Not surprisingly, fees paid to legal counsel also increase with the size of an offering. IPO v. ICO For comparison’s sake, the average cost of legal services for an initial public offering (IPO) varies from $500,000 to $2.5M USD with an offering range from $10M to upwards of $300+M. For instance, companies with revenues between $501M and $1B incurred legal-related fees ranging from approximately $200,000 to $7.5M, with an average of approximately $2.6M. In addition to systematically preparing for an ICO through a readiness assessment, which can anticipate and prepare for surprises, companies may be able to control costs in a number of ways. A best practice is to identify an individual, internally or externally, that your team can utilize as an ICO advisor, such as legal counsel, that can help management as they: • Build the IPO plan; • Keep task lists; • Monitor progress; • Forecast delivery dates; • Identify gating issues; and • Keep decision-making on track. Further, companies may be able to minimize accounting and legal costs by ensuring the company is properly formed and appropriate corporate governance is in place, all areas of potential regulatory focus have been thoroughly prepared for in advance, and information about the ICO is then made available and responded to in a timely manner with complete and accurate information. Many companies create unnecessary problems for themselves by not engaging in an ICO readiness assessment prior to undertaking an ICO. Question To Consider Do we expect to utilize legal counsel related to the organization and incorporation of our new entity, including the drafting of bylaws and other agreements?
- 2. Costs and Considerations of an ICO: A Compliance Perspective July 2017 ICO Readiness Framework The costs of building and maintaining a company infrastructure are just the beginning of preparing for an ICO. As a result, in addition to the costs associated with an ICO—the offering and incremental organizational costs—there are significant expenses related to compliance and purchaser expectations and reporting. As companies think about their ICO, they want to think about the following categories of considerations: • Corporate Strategy and Infrastructure; • Accounting and Financial Readiness; • Governance and Internal Controls; • Media and Investor Relations; • Financial Risk Management; • Legal; • Tax; • Manpower; and • Technology Support. These considerations are layered on top of the technology of the offering platform (project management, change management, communications) and ensuring your technology partner understands its own obligations. Gagnier Margossian LLP has addressed some of these considerations below. Corporate Strategy and Infrastructure These standards address matters such as board composition, structure, and process. An accountability structure needs to be in place for the funds to be raised through an ICO, and a large part of that accountability is having the people and processes in place to provide this accountability. Accounting and Financial Readiness Having your financial house in order is important prior to issuing your offering/information memorandum for the ICO. Key questions include: • Do we currently have a repeatable monthly and quarterly close process? Do we have the ability to close our books accurately each quarter, and to review and report the results to our purchasers? • Does our finance department or third-party firms possess the expertise with accounting and reporting requirements to allow us to comply with regulations? • Does our financial planning and analysis function have the ability to accurately forecast our results to allow for more effective interaction with the investing community and to assist in analysis of the current period results for reporting purposes? • Have we established an ethics and compliance process and communicated it throughout the organization? • Are all our processes and controls adequately documented and tested, or do we have a plan to comply with applicable regulations? • Does our technology infrastructure adequately support our compliance efforts? As a result of these considerations, there are a number of different types of costs that are incurred, both one-time and incremental ongoing costs, such as internal staffing, external resources, and corporate governance. Technology Support Companies must also consider the need to increase their technology function as a result of becoming company funded through an ICO that has accountability to its token holders and investors. Specifically, companies must ensure that their systems and processes are documented and tested to comply with any applicable regulations or best practices. Legal Securities counsel is pivotal to the ICO process. Securities counsel will be heavily leveraged to provide legal advice to the company in its dealings with regulators, investors, and technology partners. Generally, these pre-transaction attorneys will be retained to provide ongoing services to your entity in regards to the ICO, assisting them in compliance with regulatory requirements and advising the company regarding any legal matters related to the ICO, pre-offering and post-offering Transaction-based engagements can come at a higher rate versus engaging counsel who can essentially help “quarterback” the entire process. Questions? Contact GAMALLP Christina M. Gagnier gagnier@gamallp.com