The ICO Boom of 2017: How Token Sales Took Off and Drew Regulators

In 2017 thousands of people sent cryptocurrency to unknown start-ups in exchange for newly created tokens. These initial coin offerings, or ICOs, raised large sums within hours, and then attracted regulators in several countries. Looking at what actually happened is a useful way to understand why rules on crypto fundraising look the way they do.

Where ICOs came from

The first token sale is usually traced to Mastercoin in 2013, which raised funds by selling tokens built on top of Bitcoin. Ethereum's own 2014 presale followed, and then The DAO in 2016. When Ethereum introduced smart contracts and the ERC-20 token standard, it became far easier to create a token and sell it. A project could write a short contract, publish a whitepaper and open a sale.

How a typical ICO worked

1. A team published a whitepaper describing a product and the role of a token in it.
2. The sale opened, usually accepting Bitcoin or ether.
3. Buyers received tokens, which could often be traded on exchanges after the sale.
4. The team used the proceeds to build the product, at least in theory.

Compared with a traditional equity raise, there were few formal gatekeepers. Buyers did not receive shares or legal rights in most cases, and projects were often based in jurisdictions chosen for their light regulation.

The 2017 surge

The number of ICOs rose sharply through 2017. Several examples became well known:

• Bancor raised about 150 million US dollars in a few hours in June 2017.
• Tezos raised around 230 million dollars in July 2017 and later became caught up in disputes between its founders and the foundation, leading to legal action.
• Filecoin collected roughly 250 million dollars in total between its presale and public sale in the second half of 2017.

Amounts quoted in dollars depend on the crypto price at the time of the sale and are approximate. The popularity of ICOs drew in large numbers of retail buyers, partly because early token prices had risen quickly, and partly because the barriers to entry were so low.

Problems that appeared

With so little oversight, problems were frequent. Some projects were plainly fraudulent, and others collapsed after failing to build anything. Teams occasionally disappeared with funds. Others faced security incidents, such as attackers hijacking a sale's web page to change the payment address. Researchers and regulators later reported that a significant share of ICOs failed to deliver a working product, though estimates differ by study and method.

How regulators responded

The central legal question was whether a token counted as a security. In the US, the SEC applied the Howey test, a long-standing legal framework asking whether people invest money in a common enterprise expecting profits from the efforts of others. Tokens that met the test needed to follow securities rules. Not every authority agreed on definitions, and the approach varied from one country to another.

Terms used in token sales

Token sales developed their own vocabulary. A soft cap was the minimum raise needed for a project to proceed, and a hard cap was the maximum it would accept. Some sales used whitelists and identity checks, while others were open to anyone. Vesting schedules released tokens to the team gradually, in theory discouraging early sell-offs. In late 2017 a legal framework called the Simple Agreement for Future Tokens, or SAFT, was published by Protocol Labs and the law firm Cooley as a way to sell the right to receive tokens to accredited investors before a network launched. Regulators did not treat it as settling the legal questions. Sale pages were also prime targets for phishing and hijacking, so careful site security was part of running a sale; see our security page.

After the boom

The market cooled during 2018. Fundraising shifted towards alternatives with clearer regulation, including security token offerings, and later models like exchange-run token launches. In Europe, the Markets in Crypto-Assets regulation, known as MiCA, was adopted by the EU to create common rules for crypto-asset issuers and service providers.

Some tokens from that era survive and are used in real products. Many do not. The honest summary is that ICOs lowered the cost of raising money and also lowered the cost of misleading people.

Reading a token sale critically

History suggests a few basic checks. These are general due diligence points, not advice about any particular asset: is the team identifiable, does the whitepaper describe a specific product, are the legal terms clear, and does the project say what happens to the money? Be sceptical of guaranteed returns.

A practical lesson for site owners

If your own business collects money online, trust is the product. Use HTTPS on every page, display clear contact details and use an established payment processor. You can read how certificates work on our SSL page, and every Zebra Hosting plan comes with a free certificate.