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."
Reverse ICOs
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.
