RICHMOND — Companies using blockchain technology need to raise capital just like any other company. One way these companies have raised capital is through initial coin offerings (ICOs), which require the new company to create tokens that can be sold to investors and used for the development of new projects and innovations.
As an alternative to ICOs, however, initial loan procurements (ILPs) are an increasingly popular crowdfunding method for companies looking to attract investment capital for blockchain projects. ILPs appeal to investors interested in blockchain technology, but who are wary of the volatility and other risks of ICOs.
As with any investment opportunity, the State Corporation Commission (SCC) reminds Virginians to investigate an ILP offering before they invest. “Protect yourself financially by knowing the risks and how an offering works before you invest your hard-earned money. Understand how you will be paid and any legal or tax implications,” said Ron Thomas, director of the SCC’s Division of Securities and Retail Franchising.
Investors interested in ILP offerings should understand how they work and how they are different from ICOs. An ILP allows borrowers and creditors to enter into loan agreements through smart contracts stored on a blockchain. These contracts cannot be altered and provide a level of security lacking with ICOs. Instead of receiving tokens as with an ICO, an ILP investor lends money to the company that agrees to pay the loan back at an agreed time under the contract. With ILPs, investments are tied to the company’s repayment of the loan and an investor is entitled to returns in the form of interest on capital invested. ILPs purport to be less volatile and speculative than ICOs, where investors hope that the tokens they receive will maintain or increase in value over time.
For questions about investment products and companies that may be regulated, contact the SCC Division of Securities and Retail Franchising at 804-371-9051 or toll-free in Virginia at 1-800-552-7945. You may also visit the division’s website at www.scc.virginia.gov/srf/. To learn more about initial loan procurements, visit the North American Securities Administrators Association’s website at www.nasaa.org/51590/informed-investor-advisory-initial-loan-procurement/?qoid=investor-advisories.