In 2017, the Initial Coin Offering (ICO) exploded onto the global scene and upended the traditional method of funding an early-stage business. For a while, many believed that we were witnessing the dawn of a more egalitarian financial era; one where anyone with a good idea and the ability to make it a reality could access easy money and a shot at success. As it turned out, it was too good to be true.
Cut to 2018, and we now know that somewhere on the order of 80% of ICOs conducted in 2017 have since been identified as scams. Together, those scams cost investors approximately $1.3 billion and tarnished the idea of ICOs as a business funding tool. Worse still, the rising tide of fraud got the attention of the Securities and Exchange Commission (SEC), which has come down hard on the ICO market.
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Given all of the controversy and problems, you’d think that the ICO market would be all but dead. According to the latest available data, you’d be right — with the Wall Street Journal reporting that a paltry $118 million has been raised through ICOs in the first quarter of 2019. When you compare that to the $6.9 billion raised during the same period in 2018, the true state of the market becomes painfully obvious. That, however, doesn’t mean that all of the ICO action came to naught; it instead served as a precursor to a metamorphosis of the concept itself.
If you look a little bit deeper into the data regarding the flurry of ICOs that occurred between 2017 and 2018, you’ll notice an interesting trend. On the whole, as the ICO wave crested, a larger and larger share of the money being raised for each offering was coming in the form of pre-sales and SAFT (Simple Agreement for Future Tokens) arrangements. Those phases of ICO funding represent traditional investors and VC firms getting in on the sale before the general public, which looks a lot more like business as usual than a noble and fair investment method.
Logically speaking, it was always a matter of time before large-scale investors turned their attention to the ICO market. Venture capital veteran Chris Sacca said way back in 2017 that “I believe Crypto/Blockchain are real/here to stay. Extrajudicial assets/finance are inevitable.” That sentiment was clearly shared by his contemporaries in the VC market, as well as by institutional investors. The only difference was that they were never going to be willing to wait in line with John Q. Public for newly-minted tokens, which is why SAFT sales were structured as securities even before the SEC finally stepped into the ICO market. Those arrangements also offered a ready excuse for the big boys to move to the head of the line.
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The shift in ICO activity toward larger investors brings us back to what has happened to the broader ICO market. While the investor interest in ICOs has cooled, there’s been a corresponding rise in interest in Security Token Offerings (STO). As financial instruments, they operate much like any other conventional private investment offer — and are regulated under the very same securities laws. In practice, that means there are some limitations on how much money businesses can raise through such an offering and who they can offer it to. Spoiler alert: the gist of it is that you need to be an accredited investor, which is shorthand for “sufficiently wealthy”. In short, the move toward STOs is little more than the completion of a hostile takeover of the crypto market by large, wealthy investors.
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For the average investor, it appears that they’ll be relegated to smaller STOs (think $5 million total raised or less) for the foreseeable future. That’s because the current laws restrict the size of investment solicitations offered to any non-accredited investor. Given the mess that happened in the heady days of the ICO boom, that’s not a bad thing.
At the same time, however, you can expect businesses with serious and lucrative business ideas or products to line up to issue larger STOs later in 2019 that exclude smaller investors. It is possible that the SEC will come around and grant qualification for a vetted company to hold an STO that’s open to the general public. If their recent guidance on crypto token sales is any indication, however, I wouldn’t bet on that happening anytime soon. In the meantime, the masses of small-time investors once drawn to the promise of crypto fortunes will have little choice but to watch from the sidelines, much like they already do with conventional IPOs and the like. Oh well, it was exciting while it lasted, right?