The Hitchhikers Guide to ICOs
By Kaidi Ruusalepp, Founder & CEO
What is an ICO? What is this booming phenomenon, opening every single startup conference, every conversation in hubs and freaking out stock exchanges? And why on Earth has Funderbeam issued a global ICO report? Here is a very brief intro to the ICO world.
When I first started to dig into ICOs, I felt — after a nice amount of reading — that it’s way too complicated to understand. Or to put it differently — I felt too old for this. But the more I read, the more I understood that there is no common understanding and terms in this industry. Some use ICOs and some ITOs (Initial Token Offerings), some issue tokens and come coins. Some consider utility coins and protocol coins the only reliable ICOs whilst big VCs are launching ICOs where coin is nothing but a fund unit. When you are able to navigate in the space, more and more patterns become visible. So, here is what I learned so far:
- The problem is ancient. Someone has a great idea, but no money and someone has the money. So to make big things happen, those two parties have to meet. This is why we have angel investors, VCs, investment banks, stock exchanges etc. All intermediates are there to provide some kind of trust.
- Blockchain technology has enabled companies to raise funds without the above-mentioned intermediates. Tonnes of funds with potential liquidity for the investors (the lack of which is one of the major problems of private investments, including, and very much, startup investments). As some sources put it, blockchain has given startups the opportunity to print their own money.
- People hold a remarkable amount of bitcoin and Ether, which has yet very little use. Unfortunately. Any ICO/ITO would make at least some use for the cryptocurrencies held and if all goes well, with amazing returns. People are “gambling with house money”, meaning that they have very large amounts of crypto-assets, and their risk-willingness is inflated by the ease at which they acquired it.
- There is no common standard of what a coin/token (hereinafter just coin) is, and this is one of the major problems. Investors rush into new instruments without a clear understanding what it is they get. Coins vary from utility coins (USV Fat protocols to understand the essence and Filecoin Whitepaper to understand the first real protocol based ICO), to the rights-based tokens (see DAO), to fund units (Blockchain Capital). But the fact is — the coin offering has become a powerful tool to raise funds.
Overall I would name 4 group of coins — currency (BTC, XMR), utility coin (Filecoin), rights-based coin (DAO) and equity-based tokens (Funderbeam is issuing equity-based tokens). This split into four is one way to identify coins, but there are other, more deep versions of coin groups or simply the two most basic: Utility tokens and actual investments. - Regulators have not yet made up their mind on the coins/tokens. Except for China and South-Korea, which declared ICOs to be illegal. In The US, lawyers suggest going through the Howey test to understand if an issued coin is a security or not. If it is a security, all public offering rules apply. Interestingly, the chairman of the SEC just stated that he considers the majority of ICOs to be securities, based on exactly these criteria. Similarly, ESMA just released a report, announcing that “it is likely that firms involved in ICOs conduct regulated investment activities”.
If you check our latest ICO report, you can see where most of the ICOs are initiated and that indicates the “suitability” of the legal environment.
The US is a huge market for all kinds of startup funding, but Switzerland really stands out as having a significant amount of ICOs relative to non-ICO investment.
PS! There is not just one blockchain, but many. Starting with Bitcoin blockchain, Ethereum blockchain, Hyperledger (semi-private), R3 is developing their Corda, Guardtime, and others. There is still a dispute about the glory of private blockchains and public blockchains, but I think the future will welcome them both. I know that private blockchains do not have the fundamental aspects of blockchains (shared, decentralised etc), but it very much seems life will guide us to the interlinked world of blockchains. PS! I have used Wikipedia links as it is by far the best-structured text of all possible sources about above-mentioned initiatives/technologies.
So in conclusion, for you to be able to understand the ICO report only one thing is important: Take ICOs for now as a source of funding. Do not try to put it into the A round, VC round or debt. Even when the company is issuing utility token today, regulators may look at those as a securities tomorrow. Compared to the “old” way of startup funding, ICOs have not yet made to the mainstream. But the graphs show the growth is exponential. And if you are an investor, always check what is this you are actually buying (investing in).
ICOs are a fascinating new instrument, but if you don’t understand how they, or the underlying company works, you should not invest. A lot of people are panicking and rushing into investments that they don’t understand, and as in any great guide, the most important thing to take away is:
DON’T PANIC!
AML, KYC, centralisation, decentralisation, information disclosure and investor protection related to ICOs is coming up in the next post! :)
There are 3 sources I constantly follow and that give all information on the most analytical (and colourful) way you ever need:
Token Economy, USV blog, Preston Byrne blog
