ICOs 2.0
Are ICOs a bubble that is ready to pop? And if so, what comes next? Has it been a way for funding moon-shot ideas by avoiding regulations? Or does it have a much bigger potential? E.g., raising millions for a product that might never be built is a great but it does not have any underlying societal/ behavioural shift. Companies have been raising fortunes throughout history, however in several cases it has left society worse of than before: https://www.historic-uk.com/HistoryUK/HistoryofEngland/South-Sea-Bubble
Currently it is a zero sum game — people mainly invest in ICOs not because they believe in the business but rather are hoping for fast gains in expense of others.
To be more broad-based it needs to be more accessible to the local barbers, the local garage, the local baker or butcher. These independent small businesses need to be able to tap in, and their customers, people in the area, should be able to buy shares. You accept that your local pizza shop is probably not going to become Papa John's, but it is still a good business and you can invest in it, says Robleh Ali in an interview for MIT Technology Review.
Individually small businesses are but drops in the nation’s economic bucket, but in aggregate, these companies actually responsible for a vast majority of economic power. According to the U.S. Small Business Administration (SBA) the Small Business segment is responsible for nearly 65% of global GDP. And it is expected to grow as more people choose to work independently instead of working for a large corporation.
2017 study shows that 47% of working millennials now say they freelance in some capacity.
However, when it comes to financial support, those small businesses have particularly hard time. According to Washington Post the big banks’ loan approval rate for small businesses represents 25% (for local businesses such as a bakery, even lower). And those who get a loan — at what cost is it? Still in many cases banks ask for a collateral such as your house. Moreover, another study reveals that the interest rate for small businesses in 2015 has been 56% higher than for large companies, putting small companies in a less competitive position.
ICOs as a funding tool for small businesses
Technically this could be easily done using Blockchain. There are already many guides on how to create tokens and Token Sale contracts (there are libraries of tested and audited contracts, which allows the user to specify any parameters for the tokens distribution so it does not have to be done manually) in hours. Once tokens are created and Sale Contract is deployed, everyone can send cryptocurrency to the Token Sale address and get back tokenized company shares.
We even could go a step further and only accept funds from persons that have undergone KYC in order to comply with Beneficial Owner rules (a Verifier Smart-contract would check if the wallet address is linked to identity address that has passed KYC).
The biggest obstacles however are legal not technical. Currently company in Latvia can sell shares as a:
- Limited liability company by registering every new shareholder in company registry manually.
- Closed Corporation does not have to register every new shareholder in Company Registry, however they have the obligation to inform all shareholders about the possibility to sell their shares to a new purchaser and shareholders have one month to respond.
- Public Corporation through Initial Public Offering. In this case company would not have to register every shareholder in Company Registry and would not have to wait one month until can sell shares to anyone, however the paper work required is quite burdensome and for company that is raising less than $3m it does not make sense to do it.
It is quite funny that companies are pushing for change instead of regulators. Regulators would benefit greatly if they would have a transparent way to check beneficial owners of the company.
Developments in EU
In March 2018, as part of its Fintech action plan, the European Commission presented a proposal for a regulation on crowdfunding service providers. In a nutshell, companies raising below 1m EUR (the exact threshold is still in negotiations) will be able to attract funding through regulated crowdfunding platforms. The main advantage in using those platforms will be less administrative burden in attracting investment from large number of backers. If done right, this together with blockchain technology could be the long awaited solution for small businesses.
This would create a truly positive impact on how society works. As the local businesses will grow, the environment around them will become more vibrant and secure — something we all look forward.
I will have a follow up article about this topic once the regulation will become more
Photos by Kaline Ozola: https://www.instagram.com/tenavkaline
