Maximin Management
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Impacts of the Blockchain on business and society.

An Introduction To ICO, Initial Coin Offering

ICO fundraisers have raised about $1.2 billion this year, with about $600 million raised in the last 30 days, according to a July report from financial research firm Autonomous NEXT.  Is an ICO right for your team?

IPO vs. ICO

ICOs are an increasingly popular method for blockchain-related development teams to raise money for their projects, with the proceeds typically used to fund product development, legal, sales, and marketing.

So are they the same thing as an “Initial Public Offering” (IPO) — when a company "goes public" by offering some of its equity for sale to institutional investors, who in turn sell to them as shares to the public on a securities exchange such as NASDAQ?  People get excited about IPOs because they let anyone with a brokerage account purchase shares of companies like Blue Apron hoping that their shares will appreciate rapidly.  But although their acronyms are similar, IPSs and ICOs are very different.

Both describe an event used by organizations to raise capital,  but the main difference is regulation.  The "Howey Test" is a test created by the Supreme Court for determining whether certain transactions qualify as "investment contracts," which requires investors to register and get accredited. 

ICOs are unregulated, and at present, there is no authority with jurisdiction to regulate them.  The underlying technology, the blockchain, is based on the premise of a decentralized organization beyond the control of regulators.  Traditional intermediaries-- that serve as trusted third parties because of their historical position in society do not establish trust--  but rather trust is a native feature of the technology.

Because designation as a security could mean that the investment is subject to certain registration requirements, it is potentially precarious for blockchain startups to raise capital through ICOs directed to citizens and residents of the United States.   Many teams establish foundations in geographies where regulators take a more favorable view on crypto currencies.  As an example, in 2013 Bitcoin was recognized by the German Finance Ministry as a "unit of account," meaning it can be used for tax and trading purposes in the country.

So how do I launch an ICO?

We prefer the term token sale which we define as: 

"An event when a team releases its own cryptocurrency - in exchange for currently existing cryptocurrencies with liquid value, to a community of developers and early adopters – to raise capital."

Much like Kickstarter, a token sale is an event that runs over an arbitrary number of days, with a predetermined goal such as a certain number of tokens offered and sold. When you conduct a token sale, you are not selling a security.  A token sale is the creation of an asset, and you are selling cryptographic access to your network, products or services at some future date.

As an example:

  • Transactions in the case of Bitcoin
  • File storage in the case of Sia and Storj

Is a token sale right for all blockchain projects?

It depends on whether you can integrate the cryptocurrency, sold during the crowdsale, organically into your product and business model.   

As an example, Ether - the tokens that power Ethereum are required to run the DApps, decentralized applications on the network. Ether facilitates a feedback loop where the potential appreciation in value draws the attention of early speculators and developers.  The speculators become stakeholders in the protocol and have skin in the game.  Some, perhaps financed in part by the profits of getting in at the start, build services around the protocol, further increasing the value of their tokens.  In turn, bringing new users and speculators-- further increasing the value of the tokens, and so on.

Transparent communication is key to a successful token sale.

Your team, your goals and the protection of investors’ interests are topics which tend to interest the audience the most when considering a token sale commitment. Conversely, an anonymous team is likely to serve as a red flag and deter potential participation.

There is growing skepticism of token sales in certain sectors on account of perceived scams and Ponzi schemes, volatility, and unrealistic projections.  Venture capital firms, law firms, and even auditors are increasingly committing funds and resources to preserve and even enhance the token sale as a channel to capital. 

Maximin Management have established relationships with such firms that we introduce to our clients.  From the seed of an idea to the final project, we work hands-on with your team to articulate and bring clarity to the process.