Record ICO’s Swiss Ties Raise Eyebrows

Last month, Tezos with its Initial Coin Offering (ICO) raised $232 million, the highest-grossing crowd sale of in the history of token sales.

Tezos is a self-amending cryptographic ledger, given that one of its central concepts is the ability for network-wide changes to be decided upon at the protocol level by stakeholders. While typical public blockchains solely reach consensus about their own state, Tezos reaches a meta-consensus around its own protocol. This enables innovation and the progressive development of a decentralized governance model.

Tezos is part of the current wave of cryptocurrency startups, that are raising money with ICOs, that might not be eligible for normal fund-raising through venture capital. Initial Coin Offerings are similar to crowdfunding. Blockchain startups offer investors the opportunity to invest in their projects by purchasing their cryptocurrency in advance. In exchange for financing the project, investors receive digital tokens at a very low purchase price. The investors expect the value of the tokens to rise over time, with the option to sell them on online exchanges, at a higher price than the initial purchase price. The entrepreneurs use the funds to continue developing their products and launch them.

But Tezos shareholders are going to get an 8.5 percent cut of the funds raised though the ICO, nearly $20 million,. This raises a lot of concerns and questions, about how the founders of projects like this might be exploiting regulatory loopholes for quick gains, before actually delivering a product.

Several weeks before the launch of the ICO, the founders of Digital Ledger Solutions, the company the owns the technology, created the Tezos foundation, a Zug-based foundation that would oversee fundraising, receive and manage all allocations, and assign token allocations.

With their Initial Coin Offering, Tezos coined the idea that founders should receive a percentage of the proceeds in fiat currency. The founders of Tezos will receive 8.5% of all the money contributed to the fundraiser and they will also receive 10% of the tokens through Digital Ledger Solutions (DLS). The money won’t stay within the Tezos Foundation but will go to Digital Ledger Solutions, which basically owns and founded the Tezos Foundation, but operates independently. The Tezos Foundation then will also receive 10%, whilst the actual people behind DLS and the Tezos Foundation are the same.

The cash outflow will occur within 3 months of Tezos being successfully launched. I think its important for founders to get their fair share, but in the case of Tezos the payout, in cash and tokens, seems to be a quite high. Tezos has raised eyebrows as one of the few ICOs with an unlimited fundraising goal, and a structure of payouts designed to compensate the development team and early backers. Practically, this means that even if the entire project successfully launches, but fails, the founders will still walk away with a very handsome payout.

This raises a lot of questions about the ethics of an uncapped ICO that directly rewards developers with a portion of total funds raised. What is the incentive for the founders to continue working on project, if they are guaranteed an exit before they even start?

But, it looks like Initial Coin Offerings, are about to undergo a lot more scrutiny. With the recent announcement by the Securities Exchange Commission (SEC), US regulators are taking their first shot at deflating the mania surrounding ICOs, declaring that many of the digital tokens should fall under the country’s securities laws. The SEC is wants to remedy cases when companies issue tokens with the promise of delivering a product, and never actually deliver it.

In the case of Tezos, there are many conflicts of interest, unlike TheDAO. The largest ICO ever, solicited US investors and funneled cash to a US entity, while the founders will walk away from their ICO with a huge pay day.

Potentially, Tezos looks like it could be on the top of SEC’s list. It’s no surprise that Tim Draper, an investor in Tezos, called for the SEC to exempt certain ICOs from the repercussions of its ruling.