Crowdsales and ICOs Taking Over the Startup Investment Space
The Fintech industry’s embracement of Blockchain is well underway. There are now four times as many Blockchain startups than there were last year and as of Q1 2016, total venture capital investment in Blockchain and bitcoin startups now exceeds $1.1bn leading to what is now coined the Digital Economy (E-economy.)
Along with the rapid growth of companies operating in this technology, is a digital form of investment that allows Blockchain-based projects to raise funds by selling crypto tokens or Appcoins to early investors. This financial instrument allows any startup around the world to create tokens representing a digital asset or security, easily tradable on the Blockchain, cost effective and frictionless. It is called an Initial Coin Offering (ICO) and it may be one of the biggest innovations to hit our financial system.
This new investment instrument, merely used in the crypto-assets space thus far, runs more like a kick-starter campaign with backers having a financial stake in the project as with an Initial Public Offering (IPO). Investor protection is built into the platform itself with regulators learning from and working with the technology before hindering its potential. ICOs are not yet registered or regulated by any government organization. It’s a business model that allows for startups to create an offering to fund their idea and for investors to gain returns by purchasing a digitized asset as a form of investment.
It is safe to say that the crypto-crowdfunding will be the logical evolution of fund raising for startups. It is starting with the digital space and will move rapidly to the mainstream investment world. This will depend on the ability of the regulator to create the accurate field and protect both investor and business founder.
“This is where the phenomenon goes beyond just a new way of raising money. It is projects creating their own economic ecosystems to make the entire thing tick. More precisely, it is about an entirely new business model that is being created and tried for the first time: a decentralized business model. In this model there is no central controlling company, and has shared contributions and ownership by all involved. This business model is uniquely enabled by the combination of the internet and cryptocurrency.” Said Fred Ehrsam, Co-founder @Coinbase and former trader @GoldmanSachs
Teamwork between ICO issuer and Regulators
Although this type of ‘crowdfunding 3.0’ is provoking significant excitement, it is also heavily weighted with legitimate doubts. Authorities are faced with the challenge to understand, assess and frame the power of ICO investment, as it would be subject to meticulous overview from regulators around the world.
Currently, ICOs bypass regulator capacities, stepping beyond current accordance in capital investment and law perimeter. The complexities inly at even where to begin in creating regulatory framework for a borderless, ubiquitous, decentralized system. The United Kingdom, Singapore, and Hong Kong have all cautiously moved to set up sandboxed, environments for Blockchain companies to experiment so officials can better understand the extensive capacities of Blockchain. The UK Financial Conduct Authority (FCA) is considering whether to approve several Blockchain-based products for use by domestic consumers and businesses to encourage innovation and create a system of compliance as issues arise.
Seasoned investors understand that alluring ROI’s do not generally come without a higher risk associated and ICO investment is certainly appealing thanks to its impressive yield offered from cryptospace projects, but it may not be enough to combat concerns on investment protections.
In an ideal Crypto world aligned with Satoshi Nakamoto’s philosophy, the creator of the Bitcoin Blockchain, the community creates a fair self-regulated environment naturally where creators maintain rational promises, scams are identified and banned immediately as not to negatively impact the image of ICOs and indirectly Blockchain ecosystem and discourage investment.
The core of this philosophy aims to eliminate an overregulated system that would rapidly enforce strict settlement that would abort the constructing of this crowdfunding business model.
‘This [ICO’s] provides an opportunity for the blockchain community to come together with the regulatory world and flex some critical thinking muscles, keeping in mind that we’re at a crossroads and should look at this as a chance to think about the “spirit” of the law, when the letter of the law is not applicable. And the first step to accomplishing that must be the acknowledgement that technology cannot and should not exist in a vacuum’. suggests Olliana Oris Valiente, who is currently leading Rubix, a Deloitte-backed Blockchain venture.
The uncertainty and risks associated with ICO investment provides an opportunity for the Blockchain community to merge with the regulatory world and create side by side, a legal framework that maintains the spirit of the technology’s purpose: equal, global, costless and inclusive.
It is the role of the regulator to create a secured and balanced field to avoid disputes while protecting investors constructively. At the same time, it seems essential that the future will require regulators and investors alike to gain knowledge, understand and more likely learn how to conjugate code with law.
ICOs, a virtuous ecosystem
Not every project can legitimately claim an ICO. Although the hype associated makes it sound like easy money, the criteria to justify ICOs is subject to high expectations to avoid the scam [hash]tag. Founders need to cultivate a project that will reassure and convince investors. Nick Tomaino, tech-investor and startup consultant, highlighted, in an excellent article, the promenant short terms damage due to the lack of due diligence and the irrelevance of some projects, coming across insufficiently educated investors. On the long term side, Nick reckons that crypto-token fundraising will have a promising impact on the macro-economy only if best practices are adopted, healthy ICOs could be created.
Additively, I’d like to emphase how ICOs could create and leverage to a virtuous ecosystem for counterparts:
Equality and fairness
It allows for rapid financing unrestricted of geographical location or professional network. Any form of investor has the ability to hold stakes in an early stage investment round with innovate startups. The same requirements would apply to everyone regardless if the investor were personally associated with project creators, sitting on million dollar portfolios or merely making a startup investment from their farm in East Asia.
Early adopters become stake holders
Currently the kickstarter ecosystem offers little benefit other than discounted products before potentially exploding on the market or acquisition by larger conglomerates. The investor holds no stakes in the company and if their keen investment skills were correct, their early kickstarter investment sum merely yields access to development products at deeply discounted rates (the rate of their investment.) With ICOs you purchase tokens issued by the startup as means of investment. The value of the company is directly associated with the value of the token and therefor, early employees, users, investors are compensated.
Contributors to networks (like drivers for Uber) look less like worker bees and more like mutual owners in the network they are creating value in.’ says Fred Ehrsam
Crowdfunding Inclusion
Investing in startups is purely limited to access to professional and social networks associated with the projects or immense brokerage amounts and fund managers with network access to these projects. By tokenizing projects, digital assets are created, exchanged and traded through new market makers such as Lykke, Coindash, Shapeshift, with an open accessibility for global investors and project creators. It also enables visibility for creators to rapidly and broadly raise funds with a new type of currency backed by economic entities offering extrinsic value gain.
Cutting Entrance Barrier
A exhaustive study ran by PWC: ‘Considering an IPO? The costs of going and being public may surprise you’, highlights that traditionally, IPO offerings for a company are ridiculously expensive. Average costs for the company surpass 10% of the total amount raised. Underwriters receive share discounts of typically 7% on an IPO although that number can increase with smaller offerings and decrease with larger. Expenses also include an SEC registration fee, FINRA filing fee, a stock exchange listing fee, accounting fees and expenses, legal fees and expenses, transfer agent fees and expenses, printing expenses and road show expenses. Aside from the necessary legal costs, ICOs do not incur exorbitant fees and in contrast to IPO’s cut significant entrance barriers limited by cost.
New protagonists
Sprouting from this creative soil are burgeoning players aligned with decentralized interests creating new standards, new indexes and new energy. Some notable companies websites to watch include cryptocompare for early crypto adopters, CoinFund for relevant ICOs review, bnktothefuture and funderbeam for crypto investment opportunities. Cryptocompare is a great way to learn and follow the cryptocurrency market in order to make knowledgable investments where as Coinfund specializes directly in startups investment by openly debating, reviewing and interviewing ICO makers. Cryptocompare allows to create and keep track of a unique virtual cryptocurrency portfolio, gathering the investments made through the various platform exchanges and with realtime market database streaming.
Conclusion
An Initial Coin Offering (ICO) is the best financial instrument to happen to the Economy players. It is crypto-crowdfunding that breaks down barriers for investors with yielding rewards and allows for startups to gain exposure to investment assets through digital tokens. The world of digital currencies is rooted in the emerging ideas and developments of technology that offers a mutually beneficial arrangement for all market players, in phase with their prevailing needs. Today’s world demands interactive and real time services, instantaneous compliance and due diligence, artificial intelligent Chatbots, hundreds of seamless application programming interface (API,) etc. At the rapid pace and reliance we have on technology today, the digital economy is an ignited engine that will only gain more speed.
Mastercoin and Ethereum were the first projects to utilize Initial Coin Offering business models. Both have performed remarkable yield which would not be possible in the traditional economy. Their rise has inspired a plethora of actors willing to reproduce the same success (Iconomy, Intellysis, Wings, Chronobank,…). Hopefully, the standardization will promptly clean the ecosystem and market makers will lead Appcoins to the mainstream by creating a bridge between institutional investors and the ICO space. In a near future, the idea will be to launch Blockchain securities backed by real world assets.
To date, the ecosystem of OpenLedger for example, includes advertising, Blockchain talent, trading and ICO marketing subsidiaries dedicated to the idea originally pioneered as the financial technology’s goal: a decentralized crowdfunding of the future for emerging global businesses.
Yacine Teraï has over 15 years experience in Business development. Team builder, project founder, he has ran up multiple businesses at an international scale.
He has joined Coinsilium Group, a Blockchain investment fund listed on the London ICAP, as a Consultant. Specialized in crypto crowd sales, he educates business makers about how will Blockchain technology affect economically and socially our world and so their businesses.
