Bitcoin and Ethereum prices have risen steeply this year, but the funding levels of initial coin offerings (ICOs) have been even more dramatic. Everyday seems to reach new highs: Since June 2017, Bancor raised $153M, EOS raised $185M, and then Tezos hit $232M. As of today, Filecoin has raised close to $200M in its public token sale with several days left in the process.
An ICO combines elements from traditional fundraising methods—public and private—as well as newer methods like crowdfunding. However, an ICO is not just a fundraising tool, it’s a whole new token-based business model. A purchaser is not buying equity, but rather tokens that operationalize the network and represent an ownership stake in the network. The combination of these two forces creates a critical breakthrough for startups that has led tribes of fanatics to support these new open source protocols and applications.
The ICO model has several benefits: it allows a startup to raise capital from a global decentralized ecosystem of buyers; it solves the “chicken and egg problem” that all network-based services face by jumpstarting it with token holders (users and investors); and the services benefit by incentivizing token holders to add more value to the network because of increased financial and application utility.
Propel portfolio companies Brave and Civic were two of the first venture-backed, U.S. incorporated startups to perform ICOs. Both companies hired service providers—law firms, ICO bankers, and others to guide them through the process. Both companies also issued whitepapers outlining their plans and delivered comprehensive marketing and educational materials.
As new ICOs are launching at a frenzied pace (some legitimate and some questionable), learning from previous issuances and rapidly developing best practices or standards will be critical.
Regulation remains another critical question in this landscape—the SEC provided more clarity with a report focused on tokens from the Decentralized Autonomous Organization (DAO). The agency utilized the Howey Test to determine whether the tokens should be considered securities—yes for the DAO. This move supports the view that not all tokens are securities, and that classification should be determined on a case-by-case analysis. That being said, the SEC affirmed its jurisdiction over security tokens and while they are cautious about inhibiting innovation they will look to enforce and take action as required under its mandate. Singapore also published its own note informing participants that it will look to regulate tokens if they behave as a security. Market participants should continue to monitor the regulatory status of tokens and should visit the SEC’s investor bulletin as a first step.
ICOs and tokens will likely look very different as the market matures and once regulation further solidifies. But the business model and fundraising implications are here to stay, and will likely contribute significantly to the birth of a decentralized web. Here at Propel we’re excited about this dynamic model and look forward to partnering with entrepreneurs and investors as we explore it together.