In recent months, the ICO and cryptocurrency craze has really taken off. Thousands of ICOs and coins are launching across the world; most are with serious intent and legitimate goals, but others are pure scams.
But how does one discern the good from the bad?
The fundamental problem is that most ICOs start with a concept that is either validated or is in the process of being validated, yet some are just “wishful thinking”. In between the legitimate ICOs, there are countless outright scams that don’t have any real concept or product and will never have, with the purpose simply being to defraud investors.
Then there are the “joke” coins such as “FOMO”, “Doge” and “UET”. UET (Useless Ethereum Token) openly and outright stated that the token did not serve any purpose and will never do, yet still managed to receive investment exceeding $100,000 because of the premise that it’s human folly to perpetually pursue that elusive “win” – the business model of a casino.
As the saying goes “if it’s too good to be true, it usually is”.
Then there are the many that do have a legitimate purpose but also a concept that can’t or will never succeed because there’s simply no market or demand for the purposed token.
On the other side of the spectrum – and in lesser quantity – are the real winners and genuine ICOs that do have a real or innovative concept with clear objectives. High-profile ICOs such as Bancor, Tezos and Filecoin have been wildly successful in ICO fundraising, not only exceeding but even shattering funding targets beyond the wildest imagination.
Incredible amounts have been raised within a very short timespan; days instead of months (or even years) as the case may be in traditional fundraising. In 2017, more than $3.7bn was raised through 235 ICOs, exceeding the combined total seed and angel funding for the year.
In simple terms, fundraising through an ICO has the unique characteristic of enabling any company to quickly raise money without giving away any equity, thus avoiding equity dilution for the current shareholders. For this reason alone, ICOs will continue to be launched at an accelerating pace and create a new generation of start-ups across the world.
Down by Law
With every successful ICO comes a wave of excitement and euphoria followed by a hype and craze that’s very similar to the Gold Rush of the 1800s. Everybody wants “in” and most blindly follow the herd into any ICO that is getting ready to launch without really considering the viability of the concept. In China and South Korea, this phenomenon is so rampant that the Chinese government abruptly shut down the entire domestic ICO market. South Korea then also clamped down on ICOs but has recently softened and reversed its stance, with it now currently assessing suitable legislature to govern and regulate the domestic ICO markets.
Around the world, governments are grappling with their own domestic ICO markets and are undertaking many efforts to curb the enthusiasm of ICOs by either clamping down or somehow try to regulate them. And it’s exactly on this point where a difference can be made. Instead of allowing “self-regulation” or no regulation at all, each country should endeavour to regulate the ICO market just like the IPO market, however in a less strict and time-consuming manner in order to avoid unnecessary bureaucracy. At the same time, stringent KYC and AML checks should be enforced to ensure that no untaxed or criminal money enters the ICO fundraising circuit.
It is also very important that any regulation is clear, transparent and straightforward so that ICO participants can easily adhere to the rules and requirements set forth by the ICO regulatory framework. Transparent regulation is also necessary to avoid – or at least reduce – the ensuing high fees charged by lawyers, consultants, advisors, brokers and investment banks that are aiming to participate in the ICO frenzy.
Regulating ICOs in a post-IPO environment will ensure that all participants clearly know their rights, duties and responsibilities. From ICO launchers to the retail investor, everyone should be made aware of the risks involved and the possible recourse in court or through any regulating authority. This again will take time and effort but the current wave of ICOs being launched globally should be made a priority on every level of government. Perhaps the Chinese were right to outright ban ICOs, considering the size of their economy and the vast landscape of opportunists. However, a more subtle but determined approach would be a better way forward.
The Sky is the Limit
Mind-blowing ICO fundraises such as Bancor, Tezos and Filecoin have blown the ICO craze out of the water. In the very short timespan of a couple of days, Bancor raised an incredible $ 153m, Tezos an astronomical $ 232m and Filecoin a mind-bending $ 257m.
Several more high-profile ICOs have added to this wave, sweeping through the investment world and in the process have attracted your average retail investors so that in places like Japan, China and South Korea, even housewives are taking a punt at prospective ICOs that launch by the day and the hour.
The prospect of being able to raise millions of dollars instantly without too much administration or too many costs has added to the attraction of ICOs and the corporate world has taken notice.
The first to have made a move into the corporate ICO is none other than Kodak, recently issuing Kodak Coins. Who would have ever thought that a “corporate dinosaur” such as Kodak would even consider an ICO, let alone actually launch one? The response, however, has been overwhelmingly positive, with the Kodak stock jumping 44% on the news. It, therefore, appears that the financial markets are very receptive to any novel idea of fundraising, and it’s only a matter of time before a tsunami of ICOs will emanate from the corporate world simply because it’s trendy and cool.
Add to that the value of being able to raise cash on a very short runway without too much effort and you have a delightful recipe for instant fundraising success through ICOs. On this point, the corporate world has the distinct advantage of already being established, having revenues and profits (or losses as the case may be) but, most importantly, being able to prove that their business model is already working and that any token issuance has a great chance of success. In other words, the concept has already been validated.
Compared to start-up IPOs, the corporate world has the advantage of a proven track record as well as that all data relating to the company can be easily tracked and researched. Start-ups are usually at the “proof of concept” stage and must convince potential investors through a convincing white paper and savvy marketing.
IPO vs ICO
ICO “coins” are essentially digital coupons, tokens issued on an indelible distributed ledger, or blockchain, of the kind that underpins bitcoin, a crypto-currency. That means they can easily be traded, although unlike shares they do not confer ownership rights. Investors hope that successful projects will cause a token’s value to rise.
It’s inevitable that ICOs will supersede IPOs as the preferred route to raise capital. The reasons are many but the one that stands out is that there is no equity dilution and the process is fairly straightforward. By contrast, IPOs are prohibitively expensive, running in the millions of dollars to engage investment banks, brokers and corporate lawyers to analyse, prepare and file an IPO with the financial authorities.
This means that the IPO has to be registered and placed with a suitable exchange before it can start trading. The arduous process – from the IPO idea to execution – can take several months, and in some cases can even take years. Due to the high costs and time involved, IPOs are therefore only suitable for established companies that have a proven track record and the necessary resources to execute an IPO.
Apart from IPOs, there are many other ways to raise capital on the financial markets as well as through banks and financial institutions, however, all involve a lot of costs, administration and are usually very time-consuming. For example, if a company wanted to raise capital through the issuance of a bond, it would have to partner with a reputable investment bank that would charge a significant amount of costs and fees to make the bond issuance a success.
Corporate ICOs, on the other hand, could be executed and launched internally without the use of any third party, perhaps only utilising the services of some advisors or consultants that are well versed and experienced in ensuring that an ICO will be successful.
Over time, as more companies decide to launch ICOs, exchanges will be launched to cater to the new world of ICO fundraising. Investment banks and financial institutions will certainly follow suit and offer their own ICO services to the corporate world at large.
A Bright Future
ICOs will forever change the fundraising landscape. But this will only be possible when regulation governs the ICO market. This, in turn, will stimulate investor confidence and result in the increased adoption of ICOs as a means of raising capital on a grand scale. Ordinary investors will be able to participate without the “uncalculated” risk which is currently the scourge of ICO investing as no one knows the true value of a token, let alone the future value. It’s pure speculation.
Additionally, where there’s a lot of money to be made there are always the fraudsters that will take advantage of loopholes and the unwitting ordinary investor. Unfortunately, as history repeats itself, there will be a lot of ICO casualties and collateral damage; on one hand, the result of outright scams, and on the other, the well-intended ICOs that just did not work out.
Laying the regulatory foundation for the launching of ICOs will not only minimise the risk exposure but will also provide all participants with the necessary information to determine the viability of any ICO as well as safeguard against misinformation and deceit. Once the regulatory compliance requirements have been fulfilled, start-ups and corporates will be able to launch their ICOs in full compliance with the law and thus ensure that both institutional and ordinary investors are granted rights and legal recourse in a court of law.
In the foreseeable future, regulated ICOs will enable corporations and start-ups alike to raise capital in a shorter timeframe and with less administration, positively impacting the corporate finance market as well as the start-up ecosystem across the globe.
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