Initial Coin Offerings As a New Viable Way To Raise Funds.
The recent number of ICOs, the enormous amount of money they’ve raised, and the speediness they did it, has set off the alarms for funding industries from Venture Capital firms to government bodies.
ICO is an innovative crowdfunding model that allows startups to bypass traditional early seed investment. Investors often struggle to discern what category an ICO token falls into and this article explains major categories of crypto tokens.
But first let’s talk about Tokens.
Token is a unit of value issued by a private organization within blockchain system.
It physically exists in the form of a registry entry that is distributed through blockchain. Tokens can be used in a few cases:
· Within applications. Application users buy tokens as an internal currency to pay for goods and services within blockchain system.
· For lending. Tokens allow investing fiat (“physical”) money into crypto currency projects with high liquidity indices. According to profitability principle such tokens resemble borrowed bonds; they may be used as a tool for financial transactions, at the same time they guarantee fixed income after a certain period of time.
· For ICO . The issuance of tokens allows any person investing funds in any start-up project with the guarantee of getting a share of profit or fee for transactions of all amount of crypto currency circulating within the whole payment system.
Tokens enable a new business model: better-than-free
Large technology companies offer extremely valuable free products. Despite this, they have sometimes come under fire for making billions of dollars while early adopters only receive the free service.
After the early kinks are worked out, the token launch model will provide a technically feasible way for tech companies (and open source projects in general) to spread the wealth and align their userbase behind their success. This is a better-than-free business model, where users make money for being early adopters.
What are the types of ICO tokens and their purpose?
- Equity Tokens
One of the most promising applications of Ethereum-based smart contracts is the potential for startups to issue stock–or equity tokens–through initial coin offerings. This will benefit startups since the barrier to entry into the financial markets will be much lower than in the past. It will make stock trading more accessible to the average investor and allow shareholders to take a more active role in corporate governance since voting can be conducted transparently through the blockchain. It is only a matter of time before equity tokens take a central role in the crypto finance industry.
- Utility tokens
Utility tokens are such kind of tokens that allow their owners to buy different services and service items. The utility tokens are services or units of services that can be purchased. These tokens can be compared to API keys, used to access the service.
They are a way to fund projects of shared infrastructure that couldn’t be funded before. To enable such ecosystems to be built some tokens can be “pre-mined” in addition to be sold in “crowd-sales” during tokens launches.
Utility tokens, also referred to as app coins or user tokens, provide access to a company’s platform, product, or service. An example of a utility token would be the MMR token.
Since total supply is fixed, utility tokens may appreciate over time if demand for the product or service increases. However, investors should be wary of startups that describe their token as a utility or app coin but also market it as an investment because it is likely that regulators will consider the asset a security.
- Securities Tokens
Security (“investment”) tokens are such kind of tokens that give their owner the right to implement his investment interests. It may be the right to participate in a legal entity, capital, profit, the status of a creditor or a lender, etc.
A security is a broad classification that refers to any kind of tradable asset. Through ICOs, investors have access to a wide variety of securities tokens, ranging from coins redeemable for precious metals to tokens backed by real estate.
In the United States, these token sales and investments are subject to SEC securities regulations. SEC v. Howey established the guidelines for whether a financial arrangement involved an investment contract and was subject to securities regulations. As described by Cooley LLP Fintech Team Leader Marco Santori, an arrangement is a security if it involves “an investment of money. And a common enterprise. With the expectation of profit, primarily from the efforts of others.”
Utility tokes that are given by a startup to his client with the purpose of financing client`s future purchases don`t serve as securities (security tokens) as their primary goal is to make the process of purchasing easier but not to gain profit. Presumably, most tokens are securities since the majority of ICO participants view crowdsales as investment opportunities. However, if a token does not meet the three requirements of the Howey test, it may fall under the classification of a “utility token”.
- Asset Tokens
Asset tokens are digital tokens that represent a physical asset or product. A great example of asset tokens would be tokenized gold. Asset tokens are an excellent use case for blockchain technology and tokenization but are generally not as popular among investors because the value of the tokens does usually not exceed the value of the asset and thus have less upside potential than other types of tokens.
- Reputation/Reward Tokens
Finally, there are also reputation and reward tokens, which are given as rewards to users on a platform. They can symbolize a user’s reputation or simply a reward for being active on a specific blockchain platform. These type of tokens are difficult to value and are thus not very popular among investors.
Is token price fixed?
For a token purchaser, this question determines the certainty of tokens number he will receive and the token share he will own, given his contribution and a predefined number of tokens for sale. With a non-fixed price, not knowing how many tokens he will receive and what it means in terms of the token supply, he may be inclined to put more money in hopes to get more tokens. Without the knowledge of the price (we assume that the number of tokens for sale is known), the only way to “outsmart” other purchasers is to invest more.
For the project itself, fixing the token price may result in leaving some money on the table and underpricing of the token, if the demand is high. Having a non-fixed price, on the other hand, may lead to the opposite effect. BFY token’s price is $0,21 and it can be bought here. I invite you to watch the video devoted to Bank4YOU Group’s system of tokens and reach out to me if you have any questions.
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