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Initial coin offerings are an increasingly popular means for companies to raise funds.
Although the federal securities law issues raised by ICOs have dominated the media conversation around digital currency recently, there are many novel and, in some cases, unresolved accounting and tax issues that have received considerably less attention.
For issuers of digital currency and their tax and accounting consultants, there are a range of potential challenges that could dramatically affect ICO strategy, a few of which are discussed below.
ICOTalk, a popular ICO information and ratings website, estimates that there could be as many as 5,000-plus ICOs this year, up from 1,300-plus in 2017.
ICOs typically are used to raise funding for the development of a distributed ledger software system, including the issuance of “Tokens,” which can be used on that system; examples of Tokens would include bitcoin and ethereum.
Some ICOs consist of the issuance of a combination of traditional equity, such as Seed Common or Seed Preferred Stock, together with an agreement to issue Tokens at some later date. Other ICOs consist solely of any agreement to issue Tokens at a later date.
In addition, Tokens may be only exchangeable for other Tokens, goods and services or fiat currency, or may participate in the profits of the issuer.
The accounting and tax issues raised by the first type of ICO is more straightforward. The Seed Common or Seed Preferred typically is provided for in the articles of incorporation for the issuer, and almost certainly constitute “equity securities” for both accounting and tax purposes.
The amounts raised by the ICO would...