OECD Analysis: ICO can be a Faster and Cheaper Financing Option than IPO

As part of its research program, the Organization for Economic Co-operation and Development (OECD) released a study on January 15, showing a detailed analysis of the ICO ecosystem and its potential as a financing medium for DLT-based small and medium businesses (SMEs) and start-ups.

The study also examines the benefits and drawbacks of using ICOs as a financing medium for SMEs as well as some legal and regulatory uncertainties affecting its possibility.

Comparing IPOs and ICOs, the study revealed some of the benefits ICOs have over IPOs including being faster and more convenient. Shedding more light on the benefits of ICOs, the study stated the following benefits:

  • Foster the growth of customer base
  • Allow for direct access to the global pool of investors
  • Unrestricted access of retail investors
  • Democratization of SME financing
  • Expedite the execution process
  • Allows for investment in a fraction of tokens
  • Save the cost of disintermediation
  • Active participation of investors in the network
  • Lack of dilution for entrepreneurs
  • Ownership not necessarily conferred

While these benefits make it the smartest option for financing DLT-based SMEs and start-ups, the uncertainties surrounding the use of ICOs scares off potential investors. The ICO sphere lacks a clear regulatory framework, making it more of a trial and error game for investors who intend t deep their feet into this pool of uncertainties.

Some of the regulatory uncertainties listed include:

  • Lack of understanding of the potential legal and regulatory requirements among investors
  • Absence of clear ICO regulatory framework
  • Lack of clear legal rights and obligations
  • Risk of regulatory arbitrage
  • Inadequacy of KYC and AML checks
  • Lack of a clear regulatory framework on the side of the underpining distributed ledger technology
  • Uncertainties surrounding the use of smart contracts in DLTs
  • Problems associated with cross-border marketing and issuance of tokens
  • Lack of financial consumer protection safeguards
  • Structuring limitations and conflicts of interest
  • Lack of formal governance structures in the network

In conclusion, the study stated that ICOs can become a mainstream financing mechanism if some specific conditions are met. Although ICOs could be the cheapest and fastest financing option for SMEs, the study stated that it is not the best option for every project.

The OECD study suggests that policymakers are saddled with a large chunk of the job to create a conducive environment for the growth and development of ICOs. They advise policymakers to standardize disclosure requirements and enhance investor protection for retail ICO subscribers.

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