Initial coin offering (ICO) is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for cryptocurrency, typically bitcoin or ether.
Total funds raised through more than two thousand of ICOs reached over $13.5 billion as of November 2018 (www.icodata.io). In our view, however, ICOs are still far from what one could call a legitimate investment opportunity. Lack of transparency, no legal documentation, no data to analyse a project‘s value and calculate potential returns are some of the key weaknesses.
Last Friday, the U.S. Securities and Exchange Commission announced that two celebrities, boxing champion Floyd Mayweather and music producer DJ Khaled, were fined for publicly supporting three ICOs without disclosing the receiving of payments for doing so (link). The news is another sign that the SEC will not let wild crypto-related investment activities go unnoticed, following the US regulator‘s crackdown on two startups, Airfox and Paragon, for illegally raising money through ICOs.
We see the above as a positive development. We do not like it when investors lose money, even less when investors are robbed of their money. Unfortunately, most ICOs to date appear to have resulted in both. As a totally unregulated activity driven by crypto-related frenzy, it is now clear that ICOs presented one of the easiest ways to raise amounts often over $10 million without guaranteeing practically anything.
While ICO might sound similar to IPO, in which investors purchase shares of a company at a regulated stock exchange, in reality it is an alternative to crowdfunding, or venture capital fundraising, meaning financing at the very early stages of a company’s life. As such, if there is anyone who can professionally assess the viability of an ICO’s proposed business plan, it is venture capital funds. Let them do the job.
Are things going to change in the future? We believe so. With regulators in certain countries trying to proactively adopt the underlying new technology, such as blockchain and tokenization of securities, we are likely to see a gradual fusing of these revolutionary technological changes and the regulated investment world. To name just a few positive examples, Liechtenstein Government published a draft of the Blockchain Act in August 2018 (link), and the Czech Ministry of Finance just called for a public debate about the “Use of Blockchain Technology for the Administration of Securities” (link).
These or other similar initiatives will eventually result in the complete digitization of equity financing, less frictions and higher transparency. Even though you will still need to do your homework before investing into a specific project or a company, especially in its early stages, your blockchain-enabled investment account may soon give you a significantly higher level of comfort and confidence in the overall process.