What is a Reverse ICO?

What happens when a corporation realizes that distributed ledger technology provides both a competitive advantage and a fundraising opportunity? After all, there is no “rule” that says that established companies cannot do an ICO.

A “Reverse ICO” differs from a traditional ICO in the type of company that chooses to use it. Traditional ICOs are done by startups, whereas Reverse ICOs are done by profitable companies.

Characteristics of a traditional ICO

• Funding is intended to initiate real-world development of a concept or prototype that has no market history. So an ICO is conceptually available to any startup irrespective of its type, size, or age.
• Investors buy tokens in exchange for access to a future product or service.
• Token pre-sales allow seed investors and then the general public to buy in at discounted rates before the token hits an exchange.
• Years of startup runway funding can be secured in the couple of months it takes to run the token sale.
• When an ICO ends, the project creators have a reduced incentive to complete the project, no matter the amount of funding raised.
• Many ICOs were based on a white paper and a dream, and sometimes the dream was to pocket the funds raised via an exit scam.

Characteristics of a Reverse ICO

• The token sale is aimed at raising capital for the expansion of a proven capability (an existing product or service) or the payment of debt.
• Transfer of company ownership via Reverse-ICO-issued tokens is similar to the sale of stock in an IPO, and, as such, a determination of the token’s underlying valuation can be made with reasonable accuracy.
• Though the tokens are not necessarily integral to the operation of the business, a Reverse ICO may involve the transitioning of an existing user base and its transactional value to a blockchain.
• The token sale need not be public. The majority of tokens sold in a Reverse ICO may be restricted to accredited investors.

Benefits of a Reverse ICO

Regular stock can be bought back from stockholders and then reissued as tokens representing preferred, common, or a new and novel class of equity. These token allotments can give investors governance rights and a dividend stake in the company’s future profits.

Here are some benefits exclusive to the Reverse ICO:

• Questions about token offering legitimacy are much less pronounced since the offering is easily risk-assessed, with legal and fiscal transparency increasing the perceived trustworthiness of the offering among potential investors.
• Enhanced value proposition for investors due to the presence of existing human capital and operational infrastructures such as accounts receivable, logistics, legal compliance, and customer support.
• Opportunity to integrate the current billing system with blockchain payments for speed and privacy gains, lower fees, and fewer ancillary costs.
• Democratized self-governance and frictionless alignment of the incentives of disparate stakeholders.
• Network effect leveraging is more easily established for an existing product or service already backed by an established team and user base.

What separates a Reverse ICO from an IPO?

Though on the surface a Reverse ICO seems to closely model an IPO, it is nevertheless different from an IPO by design — it leverages a DLT project’s tokenomic framework as both a tool to improve the existing business model and as a less expensive and faster path to liquidity.

The board of directors of a company considering a Reverse ICO must be shown the benefits compared with an IPO. Firstly, there are early-adopter “We are staying relevant” competitive advantages. For example, the project may fund the company’s build out of in-house departments dedicated to blockchain innovation, marketing, and technical and legal support. Secondly, there is the efficacy of blockchain technology itself as applied to the betterment of the company and its long-term valuation.

An executive advocating for a Reverse ICO in place of an IPO must demonstrate that their position is guided by tokenomic fundamentals and the relevance of the blockchain use case. In other words, the internal Reverse ICO advocate must convince the board of directors that their Reverse ICO advocacy is not a case of a solution looking for a problem, as is the case with many traditional ICOs, but, rather, based on demonstratable funding and operational synergies to be derived from tokenization.

Key differences between a Reverse ICO and an IPO:

• The company “tokenizes” ownership in itself by issuing tokens instead of shares of stock.
• A Reverse ICO is less complicated logistically and legally.
• IPOs are highly regulated, while ICOs have little legislated regulation outside of Malta.
• Reverse ICO funding is sometimes comparable to late-stage venture capital or other private equity growth funding, whereas an IPO is usually designed as an exit event funded by public equity.
• Compliance checks can be built inside the token and managed at a lower cost than an IPO’s KYC/AML processing and its associated legal and accounting requirements.
• A Reverse ICO may result in a higher company valuation because it is a faster and cheaper way of distributing liquidity, and because, compared with the financial institutions that drive the IPO stock trade, a Reverse ICO benefits from the fervor of individual supporters participating in a tokenomically optimized ecosystem.
• Tokenomic smart contracts add preferences, clauses, rights, and privileges impossible to grant in a traditional equity offering.

Kik’s Reverse ICO

Canadian-based messaging app provider Kik raised $98 million in a Reverse ICO. Kik’s path to a Reverse initial coin offering started when it became untenable for the company to compete with Facebook Messenger and WhatsApp, both hosted and promoted by Facebook Inc. and its bottomless pockets. As a secondary player in a market soon to be monopolized, with growth stalled at 15 million active users, Kik had not much left to lose and was in search of a compelling new strategy.

Kik was dependent on ad-revenue, whereas Facebook’s messaging apps were ostensibly free to the user, but actually paid for with the sale of personal data. With its Reverse ICO, Kik aimed to shift from an ad-supported revenue model to blockchain-based model. Kiks populated its blockchain network with its native Kin token which is paid out as an incentive based on user activity. Additionally, developers can create novel and potentially lucrative business models on the Kik’s tokenomic platform.

In consumer tech, a few big companies dominate their space and a few small companies grasp at ways to compete before they go under. Kik succeeded in going head to head with Facebook and its near monopoly with millions of users supporting its blockchain network in 130 countries.

Conclusion

Anyone dismissing ICOs as a fad, irrelevant to VC and IPO fundraising in the long-run, will have to think twice about that conclusion with the advent of the Reverse ICO and its potential to disrupt the status quo.

The Reverse ICO model removes the primary weakness that causes traditional ICOs to fail, namely the fact that they are managed by startups (almost always over-confident and frequently self-deluded) lacking a viable product and market experience. At the same time, the Reverse ICO model capitalizes on the ICO model’s crowd-fundraising strengths and network leveraging effects.

Blockchain-based assets may well end up in portfolios of ICO naysayers as private companies are acquired by public companies through Reverse ICOs. Reverse ICO token holders may emerge as a new class of investor that more directly benefits from corporate wealth creation. If the value of stock equity begins to decline in a world where token sales start to pay off with higher returns, the Reverse ICO may soon emerge as a mainstream funding vehicle.