Look I am enthusiastic as anyone when it comes to Blockchain, crypto currencies and yes ICOs. I have done my own ICO, worked on several others and have created a new token launch platform.
But here is the thing
There are many ICOs that could be open to retrospective investigations by regulators and the authorities because they issued a token that behaves as a ‘security.’ Despite disclaimers in their White Paper and on their websites that “they are not issuing a financial instrument” or “the token is not an offer of any kind” or “the token sale is not subject to any laws”…regulators seem to disagree.
The SEC and other regulators do have a point. At what stage are the entrepreneurs misleading investors, offering promises and returns but then mentioning they aren’t issuing a security? You can only issue a ‘Security’ if you are publically listed or authorised to do so…
The naivete of 25-year-old founders that launch an ICO cannot be underestimated and dozens have tokens out there that don’t meet the guidelines. When considering how these twenty somethings ‘bootstrap’ their business, it’s shocking: they cannot afford great advice, have advisors as simply names on a website and cut corners…
With both the Swiss Regulators announcing investigations into several past ICOs and more recently the SEC announcing investigations into a diamond and real estate backed token, life is going to get a lot harder for some entrepreneurs that cut corners and didn’t take the right advice. Most ICOs are now simply excluding the territories like the US that are seen as difficult to please and imposing draconian laws.
The crowd will give way to institutional money
As I have said many times Institutional money is itching to get involved in crypto, in Blockchain, in this emerging market that offers returns traditional opportunities don’t offer. But they need to see certain things done properly so that they are allowed to invest: VCs, Investment Banks, Hedge Funds will invest in the right ICO…as they do IPOs.
New ICO platforms now offer investor confidence and full AML/KYC and accreditation to identify and for investors to disclose their status as “sophisticated”…what is not to like? Cross this hurdle and then BOOM…you get access to trillions in dollars that has been looking for a home for years…
“IPOs are expensive requiring a lot of background work, legal activities (due diligence), an investment banking partner and an endless roadshow, the net result of course is often massive equity dilution and being landed with expensive debt to pay back.”
Enter the new type of ICO, “the secondary market ICO,” that is becoming more popular as existing companies with products, services and real customers now see ICO as a means to help them raise additional capital. They are much easier to organise, have capital behind them to do things properly and understand the need for a complaint approach, driven by the broader requirements to look after and keep informed existing investors.
The Secondary Market ICO also called a Reverse ICO, which is a misleading term that is becoming very popular as CEOs see this as an option to speed up secondary funding and a means of raising new sources of capital. Although under Sec Reg A, Reg D and 506c the hoops to jump through can be onerous and similar to IPOs and other forms of issuing a security.
But then again, management who retain entrepreneurial flare are used to disclosure, audit and financial disciplines and will understand the need to have more structure within the context of their ICO…knowing they will need to (i) satisfy existing shareholder concerns, (ii) will have sufficient capital to take the right legal and tax advice and (iii) have real income from customers.
“But then again, why don’t these established businesses use traditional capital markets channels…cost of capital, strings attached, further dilution, fees and charges, time and dealing with bureaucracy…?”
Source of the money matters
For any token, whether a so-called app token that supports the consumption of a product or service, where buyers buy the token to spend, or do something to earn them; or a security token that offers investors a return of something, best business practise suggests you need to understand where the money comes from…
The source of capital matters, and at least some KYC and AML must be done. It is inevitable that institutional money will have concerns about criminal money and it is no good simply blocking certain territories. IP addresses and the like can be easily spoofed.
Institutions look at risk. It is their number one concern and most regulations are formed around this core tenant. The risk of failure yes, but the risk of not knowing who you are dealing with and the full extent of who they are matters more… Although many will claim regulation will stifle innovation and make an ICO just as expensive as an IPO…and they may have a point, ICOs do have the look and feel of issuing an unauthorised financial product, but this debate is unlikely to be resolved for several months…
More good news coming
The quality of ICOs will get better as the community starts to police them and squeeze out the scammers and the weak projects run by entrepreneurs that simply don’t have the experience of running anything.
The secondary market ICO, because they revolve around established businesses, will start to attract more capital in larger chunks, with larger institutions and investors dropping a few million here and there.
When the token is announced as a security everyone focuses on the job in hand and everyone’s interests are aligned. The net net is this will bring in more capital into the crypto world which is good for everyone.