Equity Crowdfunding w/o “The Blockchain”
During a talk at TechCrunch Disrupt Sam Altman stated,
“We are interested in how companies like Y Combinator can use the blockchain to democratize access to investing.”
While I agree and support this initiative fully, I believe that people seem to confuse the benefits of blockchain technology with those of equity crowdfunding. In many cases these two ideas go hand in hand, but the benefits of equity crowdfunding can also be produced without “the blockchain” piece.*
Equity Crowdfunding + Blockchain Technology = Perfect Match
At the most basic level, a blockchain is a database. Nodes in the network, known as miners, are in charge of processing new information that enters the database and reaching an agreed upon the state for this database. The information that this database holds can be very different, from unspent transactions (Bitcoin) to code (Ethereum). In the blockchains that are listed above, it is necessary to have a native currency.
In order for a blockchain to work, people must commit resources (computers and electricity) to the network to verify the transactions being processed on the blockchain. To incentivize people to commit these resources, there needs to be a reward. This reward occurs in the form of the blockchain’s native currency.
Blockchains are decentralized networks. This means that there isn’t one server that holds all the code, a CTO that is in charge of implementing new features, or a company that is collecting profits off of each transaction. Code updates/bug fixes are developed by the community and implemented via consensus. The nodes who are conducting work for the network are rewarded with the transaction fees users pay. Due to the decentralized nature of these networks, one can’t “own” a piece of this network. The network can be contributed to, but not owned. Even if in an obscure way there was ownership of the network, I imagine this model would be unsuccessful because there is no incentive for others to contribute. There is an inverse relationship between the centralization of a blockchain and the value/security of a blockchain. A crowdfunding distribution model for a bloockchain’s native tokens works well because a large community is established that holds an equity stake in the network.
Conclusion #1: Equity crowdfunding distribution models work very well with blockchains**
Benefits of Equity Crowdfunding
Things I hear frequently about how tokens will change everything:
1) Create ground up communities around a mission, protocol, or organization
2) Create incentive for all shareholders to contribute to the network
3) Early users of a network can benefit later in the life cycle of a product due to their early interactions
4) Access to capital is democratized
While these are all amazing effects that are produced, they occur due to the nature of crowdfunding and not blockchain technology. When the opportunity for ownership is democratized, there are many positive outcomes. There is a broad network of people who are incentivized to promote their investment, an early user base is established, and ideas that traditional venture capitalist view as non-fundable can be funded. This last point can also have negative consequences. If you are interested in understanding the effects crowdfunding can produce, please read Vinay Gupta’s article called The Transparent Future. It is incredible. Here is a short excerpt:
“Equity crowdfunding is the way that we could open that river of money up, so that we could take all of this wealth which is being poured into the pockets of the technical elite who are bored with the reality that we have given them, and we could give them the social mechanisms to turn that money into unbelievable technological acceleration, which is more or less the only hope that we actually have of fixing the fundamental problems of the planet that we’re on.” — Vinay Gupta
All the benefits listed above could be produced from equity crowdfunding, even if blockchain technology wasn’t created. The reason that there isn’t a broad equity crowdfunding ecosystem is due to the current regulations that are in place. For example, if you want to join AngelList, you must be an accredited investor. This means that you either have:
A) Net assets that are worth at least $1 million
B) You have had a yearly income for the last two years more than $200,00.
Due to these requirements, most people are excluded from this Accredited Investor status. While it is possible for non-accredited investors to invest in equity crowdfunding rounds, the raising company takes on significant burdens when they accept non accredited investors money. One reason we have seen an explosion in the ICO market is because traditional equity crowdfunding regulations haven’t been implemented, yet…
Governments across the world are at a pivotal place in regards to developing Token/ICO regulation. I believe that we should be developing new regulation for the entire crowdfunding landscaping, not just blockchain technology. As Sam Altam mentioned in his talk:
“[M]ore and more of the wealth creation here is not available to most people, and I think that’s very bad in a society with already so much wealth inequality. If there’s a way that new technology can make it practical and possible to democratize this, I think that’d be great.”
I agree with Sam’s statement, but I don’t think this will be achieved unless we are able to develop new equity crowdfunding regulations.
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- * I realize that when one buys a token, they are not receiving equity in the protocol according to the traditional definition of ownership. While I realize there is a huge difference, I am putting Utility Tokens and Shareholder Equity under the same “Equity” umbrella. When referring to Utility Tokens, I think that it is appropriate to put them under the “Equity” umbrella because token owner’s interests are aligned with those of the protocol and its creators.
- **Blockchain technology makes equity crowdfunding easier because the governing rules/decision making processes are outlined in code, not in complex legal terms. (This has a downside as well…) With many different shareholders, this governance system seems much more effective.
