Since initial coin offerings are still largely an unregulated means of raising financing for new cryptocurrency projects, the introduction of regulation in the blockchain space is a major factor that will significantly alter the current landscape.
ICOs have seen a steady rise in popularity over the last year, with funds raised during crowd sales meant to support the development of blockchain projects. In the process, the holders of specific ICO tokens hope to create for themselves an opportunity to access the developed blockchain based products or services following their launch. This is because in practice, ICOs tend to take place before the underlying products or services are created or are fully operational.
One of the main controversies currently plaguing the ICO market is the fact that companies have been accused of exaggerating the benefits of their technologies to potential investors and overlook the risks while creating unjustified hype just to promote their ideas.
The current state of ICOs
Token sales have a pre-sale aspect that’s akin to crowdfunding, but which differs in that there is no pre-sale price commitment to token holders. In fact, the idea of issuing company-specific tokens dates back to the early 90s when a similar concept was explored by Dr Edward de Bono who put forward the idea of private currency as a claim on products or services produced by the issuer. However, ventures utilising this type of capital raising tool today have been slowly gaining wider support since the establishment of the Bitcoin blockchain by Nakamoto in 2009 but more specifically within the last year.
ICOs have become the financing tool of choice for many blockchain-based businesses. The solutions being created also service diverse industries in a variety of ways. In essence, initial coin offerings are a method of enabling protocols on the blockchain to be accessible to all, while also providing much needed funding.
Investing through ICOs typically involves:
● Supporting a protocol of your choice — one that is scalable, viable, and valuable;
● Using the protocol and the token ownership to gain access to blockchain platforms; and
● Speculating about the future adoption of the protocol and any potential increase in token value as a result.
To many, ICOs are still a novel mechanism for financing entrepreneurial quests and through this type of offering, an entity will offer a stock of specified crypto tokens for sale with the promise that those tokens will operate as the medium of exchange when accessing services on their decentralized app, software of digital platform. Last year alone, startups in the blockchain domain managed to raise of over $7 billion. That figure when compared to the $1 billion raised through conventional venture capital is very significant.
The ICO Business Model
ICOs are very popular with entrepreneurs who are often confronted with sizeable upfront costs of setting up a venture. In most cases, revenue can only be generated once the venture is up and running so entrepreneurs use ICOs as a method of gaining liquidity through raising pre-revenue funds to finance the upfront costs.
ICOs are certainly an alternative form of crowdfunding that have emerged outside the conventional financial industry and most ICOs are intended to finance projects on a public blockchain. Millions can be generated through an ICO in a very short timeframe but since the success of an ICO is deemed somewhat speculative, and there are still no clear regulations in place, some investors see these types of alternative investing models as too risky. However, for entrepreneurs trying to push the envelope and bring innovation to the masses, ICOs are an ideal way to realise their visions.
According to a report by PWC, “Firms have to pay $3.7 million to go to IPO. In contrast, ICOs can cost close to nothing to conduct. Developers and entrepreneurs, who are not necessarily even incorporated in any geographic location, can launch an ICO without involving an underwriter, receiving the appropriate green lights from regulators, or paying the costs.”
An ICO is therefore a fundraising mechanism that offers many benefits and presents fewer roadblocks, consequently making it very popular.
Some analysts have reported that only coins that have at least three years of data provide empirical evidence that ICOs have systematic overpricing which is deemed as a higher closing price on the initial day of the token being traded on an exchange relative to the closing price on the three-year trading anniversary of the token. With thousands of actively listed cryptocurrencies, more and developers are launching their new cryptocurrencies through initial coin offerings or token generation events but with this increase in use of the ICO mechanism, more and more controversies emerge and only time will reveal how the blockchain industry will come together to stabilize and legitimize ICOs, perhaps through embracing regulation.
A brief look at the regulatory landscape
The noise around regulation with respect to ICOs echoes louder and louder with each passing month. We have seen some significant action taken from various concerned parties including the banning of crypto ads on some social media sites. Some notable regulatory bodies such as the European Securities and Markets Authority have given their views on the matter stating that “Firms involved in ICOs must give careful consideration as to whether their activities constitute regulated activities. If their activities constitute a regulated activity, firms have to comply with the relevant legislation and any failure to comply with the applicable rules would constitute a breach.”
It remains to be seen how the nature of ICOs and how they are conducted will change over the course of 2018, but it is safe to say that initial coin offerings will certainly be shaped by regulatory frameworks that are seemingly more likely to be set up in order to systematically monitor blockchain technologies and more specifically the financing tools used by blockchain businesses such as ICOs and cryptocurrencies. In such a fast-paced industry investors and interested parties always have to pay close attention to the developing trends and try to measure the impact that regulation might have on the long-term growth of their projects in this relatively new industry.