The tokens are promoted as future functional units of currency if or when the ICO's funding goal is met and the project successfully launches.
ICOs can allow startups to avoid regulations that prevent them from seeking investment directly from the public, and intermediaries such as venture capitalists, banks, and stock exchanges, which may demand greater scrutiny and some percentage of future profits or joint ownership.
[citation needed] ICOs may fall outside existing regulations,[1][2] depending on the nature of the project, or be banned altogether in some jurisdictions, such as China and South Korea.
At the start of October 2017, ICO coin sales worth $2.3 billion had been conducted during the year, more than ten times as much as in all of 2016.
Amy Wan, a crowdfunding and syndication lawyer, described the coin in an ICO as "a symbol of ownership interest in an enterprise—a digital stock certificate" stating that they are likely subject to regulation as securities in the U.S. under the Howey test.
[28] The Securities and Exchange Commission (SEC) has warned investors to beware of scammers using ICOs to execute "pump and dump" schemes, in which the scammer talks up the value of an ICO in order to generate interest and drive up the value of the coins, and then quickly "dumps" the coins for a profit.
[30] Jimmy Wales, founder of Wikipedia, stated in 2017 that "there are a lot of these initial coin offerings which in my opinion are absolute scams and people should be very wary of things that are going on in that area.
[32] The UK Financial Conduct Authority has warned that ICOs are very high risk and speculative investments, are scams in some cases, and often offer no protections for investors.
[35] In 2017, some investors flooded into ICOs in hopes of participating in the financial gains of similar size to those enjoyed by early Bitcoin or Ethereum speculators.
[citation needed] This makes it difficult for central authorities to control and monitor the ownership and movement of holdings of cryptocurrencies.
The SEC charged Maksim Zaslavskiy for fraud in September 2017 in connection with the ICOs for RECoin and DRC World.
[citation needed] In December 2017, the SEC issued an order stating that the utility-token ICO of Munchee Inc. was classified as a security.
[1] In April 2018 the SEC charged two co-founders of Centra Tech, Inc., with running a fraudulent ICO that raised more than $32 million in 2017.