An Initial Coin Offerings (ICO) is a largely unregulated means of crowdfunding, which can be a source of capital for startup companies which are utilizing a token in their business model (which is the subject of the ICO). In an ICO, a percentage of the newly issued cryptocurrency is sold to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. This new fundraising phenomenon is being fueled by a convergence of blockchain technology, new wealth, clever entrepreneurs, and crypto-investors who are backing blockchain-fueled ideas. ICOs present potential advantages and disadvantages, as well as threats and opportunities to the traditional crowdfunding and Venture Capital business models due to their massive and growing mainstream acceptance.
Chronology Of ICOs
The first ICO was held by Mastercoin in July 2013. In 2014, Ethereum raised money with a token sale, raising 3,700 BTC in the first 12 hours, equal to approximately $2.3 million dollars at the time. During the first quarter of the same year, an ICO was held by Karmacoin for its Karmashares project. One of the first mainstream ICOs was executed by the messaging app developer Kik in September 2017. Kik had previously issued $50 million in tokens called “Kin” to institutional investors, and sought to raise an additional $125 million from the public. At the start of October 2017, ICO coin sales worth $2.3 billion had been conducted, more than ten times as much as in all of 2016. A project called Bancor raised $153 million within a handful of hours in June this year. On the same month, Status.im raised at least $64 million. Both evoked so much enthusiasm that transactions clogged up the underlying network. As of November 2017 there were around 50 offerings a month, and a new web browser Brave’s ICO generated about $35 million in under 30 seconds. The highest value raised by an ICO so far has been Tezos, which raised a record breaking $232 million in less than a month! Almost $2 Billion has been raised so far this year by start-up technology companies via Initial Coin Offerings. That amount is likely to be closer to the $3 Billion mark given some of the exciting ICOs coming out before the year’s end.
More ICOs Ahead!
Estonia has put out the idea of potentially raising money by issuing a token called estcoin. The country is pretty forward thinking when it comes to technology – they are the first nation to offer an e-Residency program. The J-Coin ICO certainly looks to be interesting, with a consortium of Japanese banks getting ready to launch a national digital currency to pull citizens away from paper money as the J-Coin ICO is expected to take place ahead of the 2020 Tokyo Olympics. For now, the Bank of Japan and financial regulators are backing the project. And there are other national cryptocurrency ICOs that have been proposed, such as in Venezuela and in Dubai, UAE.
The Upsides and Downsides of ICOs
Many factors influence the chances for a successful ICO and they can predict whether it will be valuable for its investors or not. While ICOs are purposely meant for raising capital for a startup, they are also used to kick-start the sale of a service to be taken to market or launch the use of a new cryptocurrency. On most occasions, the investor becomes the consumer of the service being offered by the company raising funds through an ICO, which allows investors to buy coins (tokens) at a discount, although the final price valuation will ultimately be dictated by supply and demand once released into the market. While historically, startups would have raised capital through Venture Capitalists, the advancement of fundraising through ICOs has been almost spectacular. While Venture Capitalists tie up investor money for lengthy periods of time that can extend to years, ICO money is far more liquid, with value easily assigned, and traded within a very short period of time. The liquidity associated with ICOs is certainly a contributory factor to the increasing number of ICOs, with the lack of cumbersome documentation and unjustified demands and requirements of the VC also avoided.
While there are positives, there are also negatives to consider and some of the more negative elements of investing in an ICO are apparent. The mention of less successful stories include the Mycelium ICO. Its team members just disappeared after raising the money, and later it was reported that they had used the funds to pay for their own vacation. The lack of regulations is likely one of the reasons many ICOs turn out to be frauds, or are poorly managed. When the CoinDash ICO started, $7 Million was stolen. Right before the start of the token sale, their website was hacked and the ICO wallet address was changed to the hacker’s address. ICOs are also well-known for not taking off, with too many projects being alike or with projects failing to reach expected levels, driving the value of the initial coins to zero. A lack of governance can bring investors losses. A lack of appropriate due diligence can leave investors open to Ponzi schemes, scams, and frauds.
While cryptocurrencies have seen advancements in the regulatory landscape with countries such as Japan and Russia recognizing cryptocurrencies as legal tender, ICOs have yet to fall under the cloak of regulators. The U.S. Securities and Exchange Commission (SEC), in light of The DAO fiasco last year, has ruled that digital coins and tokens from ICOs are considered securities and must be subject to federal securities laws. As such, it is not as easy for U.S. companies to hold an ICO or for U.S. citizens to participate as they have to be registered and comply with securities laws. This increase in regulatory efforts, however, means that ventures and investors must proceed more cautiously on what kinds of crypto activities they perform or participate in. On one hand, this protects citizens and consumers from exploitation, inspiring a more trustworthy ecosystem, although it can also possibly hinder innovation. Tougher ICO restrictions also give other countries the opportunity to become havens for crypto activities and ICOs. Singapore and Japan appear to be cultivating more positive environments to support blockchain ventures, thanks to proactive legislation.
Then there are the countries that have outlawed ICOs, such as China or South Korea, or those like Vietnam that ban payments in cryptocurrencies, which have a large effect on ICOs. Also included would be countries with mixed messages, such as Russia, where senior officials have made positive remarks about cryptocurrencies but where strong data protection laws that could hamper ICOs also exist. Some jurisdictions have put out the welcome mat for ICO issuers: Gibraltar, the Cayman Islands, Mauritius, and the Isle of Man. Not coincidentally, these are also some of the traditional big offshore financial centers, and want to continue to be the leading offshore financial centers.
In part 2 of this article, we will talk about the events of the last six months, such as regulation activities and statements. For example, Singapore financial authorities have recently clarified ICO regulations in Singapore, and an ICO ban in Japan is a ‘definite possibility’ according to a recent article by Forbes. In part 2, we will focus on Southeast Asia, including Malaysia, Indonesia, Cambodia, etc. Stay tuned for that!
Despite a recent crackdown on ICOs by the SEC and other regulators, demand is stronger than ever, which in recent months has eclipsed Venture Capital rounds as a source of fundraising for startups. ICOs and crowdfunding have propelled the finance model fully into the business mainstream. As more companies and investors embrace them and questions concerning regulation are answered, ICOs and crowdfunding may be a novel and important mechanism for cryptocurrency-based startups to raise capital and disrupt the various fundraising industries.