A defining feature of 2017 for cryptocurrency — and FinTech more broadly — was the rapid adoption of Initial Coin Offerings as a means of capital raising.
As we’ve written previously, we think 2018 and beyond will see the increased adoption of blockchain technology by existing businesses (though ICOs remain attractive for innovative start-ups). We also think the regulations will make the overall environment for ICOs uncertain, but carefully-planned ICOs assisted by suitable expert advisory teams could continue to flourish.
So, is an ICO a good method of capital raising for your business?
How does an ICO work?
We’ve written extensively on this elsewhere, but ICOs are essentially a blockchain-based means of capital raising. A company issues unique cryptocurrency tokens through an ICO. Those tokens are then bought by various investors/purchasers/speculators.
The legal character of ICOs can vary — at one end of the spectrum, the process can be like an IPO, with the ICO tokens effectively representing securities in the ICO company. At the other end, the ICO can be more like a form of token-backed crowdfunding/pre-sale of a product.
What are the benefits of an ICO?
There are many (including simply that they are fashionable and comparatively easy to raise money through in current market conditions), but the key, fundamental benefits are:
Time & Cost
Running an conventional Initial Public Offering (IPO) is costly, time-consuming and complex. This is largely because regulations for IPOs are heavily weighted towards investor protection, so the regulatory burden is significant. This means legal fees and other compliance requirements are typically high. In theory, certain ICOs (or ICOs in certain countries) can avoid these requirements, and can be much less heavily regulated.
ICOs can improve market reach in two key ways.
First, issuing conventional securities is heavily regulated. Even if those regulatory hurdles are satisfied, it is often difficult for a company to reach and attract smaller investors. Typically, companies that do sell their IPO to smaller investors do so via a financial intermediary (if at all).
ICOs can connect promising start-ups or existing businesses to smaller, retail investors or purchasers. This is a huge market that, before ICOs and crowdfunding, was largely under-utilised (at least directly).
A key aspect of cryptocurrency is its ability to increase access, and ICOs are certainly able to do so.
Second, ICOs are (or can be) truly international. An IPO or other means of capital raising are usually relatively confined to certain jurisdictions. ICOs can reach investors in just about every market across the world — if anything, regulations mean the problem is reaching too many jurisdictions at once!
ICOs: The Challenges
Aside from the marketing/promotion, ‘idea generation’, project management, and other issues common to all forms of capital raising, there are two key challenges.
The first (and currently most discussed) issue to consider is regulation. Many governments recognise the potential of ICOs as a capital raising tool that can enable the rapid development of early-stage businesses/projects. However, many governments are cautious, and are keen to protect “unsophisticated investors” from losing their money on investments where the government considers that they may not be fully aware of (or able to cope with) the risks.
We’ve discussed regulatory challenges extensively elsewhere. Whilst the regulatory environment is complex and uncertain, regulatory issues can be overcome with the right knowledge and advisory teams.
A more fundamental challenge, in our view, is often developing a suitable tokenisation model.
Many projects are commercially promising, but have not applied the blockchain technology to its maximum potential. Others use the technology well, but do not offer a tokenisation model (and token rights) that adequately incentivise investors, particularly in the increasingly competitive ICO market.
Developing a tokenisation model that: i) optimises investor/purchaser value, ii) utilises the technological potential of the blockchain and cryptocurrency tokens for the business, and iii) complies with key regulatory requirements, can be especially difficult.
Getting this balance right is unquestionably worthwhile: it could be the key to unlocking the potential of the ICO market, and setting your business up for success.
Lupercal Capital and its team of cryptocurrency experts has provided strategic consulting on ICOs and blockchain to existing businesses and start-ups to help them unlock the potential of crypto-technology.
If you’re interested in regulatory developments in cryptocurrency, check out CryptoRDB, the most comprehensive database on cryptocurrency regulation.