ICO Accounting

One of the things you have to do when you have a company is the accounting.  It’s not a particularly great way to make future decisions, but it sure is a good way to show you where you have been and inform your decision making.  When we look at companies projections, the main thing we are looking at is how they choose to allocate their cash.  It shows what is important to them.

Since so many companies have done an ICO, I started wondering how to account for them.  There haven’t been a lot of blog posts about it.  I found this one on Medium and this one by Deloitte.  Since the ICO is truly the Wild West of business, I think it is very important to adhere as closely as you can to SEC rules on IPOs, and also GAAP rules of accounting for your ICO.

Even if you are doing something revolutionary, it helps to present it in a way the public and investors can understand.

Deloitte’s power point presentation asks the right questions:

  • Is it an asset?
  • Is it cash?
  • Is it cash equivalents?
  • Is it an intangible asset?
  • Is it inventory?
  • Is it a financial instrument?
  • Is it a liability?
  • Is it debt?

How the token is classified is a huge question.  It has different effects on the way it is taxed and carried on the balance sheet.  There is no standardization yet.

If a token can receive dividends from operations, it’s a security.  If it’s just a permission to use a private blockchain, it’s probably an asset that a company received cash for.  If so, that is revenue.

In Greg Simon’s post on Medium, he does an excellent job of analyzing how an ICO and the after-effects of an ICO might play out.  I recommend that you read it in full.  In almost all the cases, the technology that is going to operate the blockchain doesn’t exist at the time of the ICO.  You cannot recognize the revenue from the ICO but need to amortize it over time.  That means the company must create a liability which is not a taxable event. However, any revenue recognition is a taxable event.

Here are two points he makes that anyone contemplating an ICO should be aware of:

  1.  Startups need to be aware by issuing an ICO they may be at risk of locking themselves out of business relationships, future strategic equity investors, and acquisition.
  2. It should be noted a company could avoid the need for compliance with IFRS 15 or any other accounting standards by simply remaining a privately held entity. However, it must remain a privately held company and also avoid any future equity investors, clients, business partners, etc. that require an audit of the financial statements. 

By doing an ICO, if you are going to incur audit costs that you might not otherwise see.  Because accounting firms are unfamiliar with the ICO and there haven’t been GAAP standards issued yet, it’s best to assume those audit costs will be high.

In a typical M+A transaction, cash on a balance sheet is absorbed the acquiring company.  It can be used to leverage the deal, and it changes the price of the transaction.  If a company is carrying a lot of cash from an ICO in addition to a liability, I would assume that any acquirer would have to account for it by extinguishing the liability, recognizing the revenue, and paying taxes.  That would decrease the valuation of the company to the acquirer.

This also means that it is critically important that ICO issuers be very disciplined about the money they receive.  They could get upside down on taxes if they use too much of the ICO cash to develop the private blockchain.  If they fail to get some early traction with their chain, it’s going to be ugly.

 

  • awaldstein

    It’s going to be very ugly for many.

    Rule of thumb is some 15-25% of raise for ICOs with US investors is straight legal and tax fees.

    And even with that many I”m seeing are truely sketchy.

    Still a huge believer.

    I think it will be a good thing if some of these people get held up to the ethics they are trying to skirt.

    • I am not sure that they are skirting ethics. I am sure that they are skirting traditional fundraising routes because many of them wouldn’t be able to raise VC money. Hearing the legal around an ICO could be as much as $300k, and the tax issue is huge. I thought the linked post was interesting because it showed the journal entries and explained the rationale for the accrual accounting.

      • awaldstein

        yup linked post was a good one–thanks.

        most interesting. most squishy thing i’ve ever seen and now inside a few, more interesting and more unclear.

  • Pingback: Morning News: January 1, 2018 Crossing Wall Street()

  • Pingback: Morning News: January 1, 2018 – Paydee()