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Initial Coin Offerings – Assessing Investment Options

Startups hold Initial Coin Offerings, or ICOs, for any number of digital (and non-digital) services offered through their digital cryptocurrency. With the ERC-20 standards, ICOs are more plentiful than ever and have opened-up a new source of funding for companies hoping to provide services or solve pain points in a growing digital currency community.

An ICO is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for Bitcoin and/or Ether. It’s somewhat similar to an Initial Public Offering (IPO) in which investors purchase shares of a company[1]. The key difference being that an ICO’s crypto tokens have not yet been defined as a security, but are currently only treated a service that can be redeemed from the company’s project.

The typical process[2] of an ICO is relatively easy and is marketing, or “hype”, centric. A successful marketing campaign can easily help a startup meet their funding goals, and is most important factor in funding success. Before any marketing strategies can commence, an ICO starts by identifying a growing area in the Ethereum or Bitcoin networks that needs to be optimized or by providing a service that ties to the blockchain that is not currently available. Common and most funded areas include[3], providing anonymity to services such as banking, decentralizing the storage of sensitive information with cloud storage platforms, or optimization and saving capital by disintermediating third-party brokers to nearly any type of transaction.. In order to provide these specialized services, a team of developers are central to a successful ICO.

Blockchain and cloud computing talent is rare and establishing a team that potential ICO investors feel confident in is the next step, along with deciding on a base of operations. Switzerland and Singapore are token-friendly nations where many teams set up shop. In Singapore, where teams like TenX hail from, coins are not yet considered securities. While Howey Test debate rages here in the United States, ICO issuers domiciled here continue to use typical SEC exceptions (e.g. Reg A, Reg D and Reg CF) combined with a SAFT (Simple Agreement for Future Tokens) for offering their tokens to investors who may qualify under any number of the various exemptions.

Since a few bad actors have made off with $150 million in 2017 alone, the community has become sensitive to a development team that is transparent of their past experiences and updates on their project[4]. The team must put together a detailed whitepaper with details on the funding goals, spending break down, deadlines, and details on either the exemption they are using or the relative laws that apply based on the jurisdiction of the company’s incorporation.

After the team is formed and an adequate white paper written, the startup is ready to start marketing their ICO however they wish and collect funds over a set period of time. Common advertising channels include favorable reviews on ICO tracking websites, AdWords, and even social media advertising, including a related shared “Bounty” for token promoters across social channels. With such a large pool of potential investors, nearly any digital advertising channel is a good way for the startup to reach potential investors.

There are generally two types of investors when it comes to ICOs, those that look for 1000%-plus returns from the coin in 5-12 months, and those that invest in the coin for the purpose of using the service that the company holding the ICO will offer. The former largely outnumbering the latter, largely due to over-speculation and the venture capital-like opportunity a deal may offer to the average individual. With this new investment class, there appears to be a great deal of over-excitement of being able to invest in projects that were previously out of reach for main street retail investors. Large amounts of capital that previously took years to coalesce are currently being raised in ICOs in a matter of minutes. .The landscape of ICOs remains the “wild west.” However, this could change quickly (for better or for worse) depending on how things shake-out in the industry from both regulatory and practical perspectives. Although nothing is certain yet, it is clear that the digital currency area is growing and ICOs will be the go to funding platform for companies looking to provide services to cryptocurrency adopters.

Sources

Jonnie Emsley, 10 Most Successful ICOs of All Time Invest in Blockchain (2017), https://www.investinblockchain.com/10-most-successful-icos (last visited Jan 3, 2018).

George Beall, Before investing in that ICO, look for these four key things The Next Web (2017), https://thenextweb.com/contributors/2017/10/26/investing-ico-look-four-key-things/ (last visited Jan 3, 2018).

How To Launch An ICO On Ethereum, Coinist (2017), https://www.coinist.io/how-to-launch-an-ico-on-ethereum/ (last visited Jan 3, 2018).

Bitcoin Magazine, What Is an ICO? NASDAQ.com (2017), http://www.nasdaq.com/article/what-is-an-ico-cm830484 (last visited Jan 3, 2018).

[1] Bitcoin Magazine, What Is an ICO? NASDAQ.com (2017), http://www.nasdaq.com/article/what-is-an-ico-cm830484 (last visited Jan 3, 2018).

[2] How To Launch An ICO On Ethereum, Coinist (2017), https://www.coinist.io/how-to-launch-an-ico-on-ethereum/ (last visited Jan 3, 2018).

[3] Jonnie Emsley, 10 Most Successful ICOs of All Time Invest in Blockchain (2017), https://www.investinblockchain.com/10-most-successful-icos (last visited Jan 3, 2018).

[4] George Beall, Before investing in that ICO, look for these four key things The Next Web (2017), https://thenextweb.com/contributors/2017/10/26/investing-ico-look-four-key-things/ (last visited Jan 3, 2018).

Nanu Gill contributed to this report.

Carl Christensen
Carl Christensen is a Principal with Deal Capital Partners, LLC and InvestmentBank.com. Before joining InvestmentBank.com Carl served as CFO for a $50M consumer events company. He is a former employee of both Goldman Sachs and Deloitte. He brings both breadth and depth to the M&A advisory team here at InvestmentBank.com.