Without doubt the ICO phenomenon has changed the course of funding for tech companies. A huge amount of money has been raised in what has seemed like the wild west of finance. In fact one of the key things about the tokens being offered is that they are for use in the service – unregulated for the large part but that is changing very fast.
One of the key aspects of this has been that the money has been raised from large numbers of individual investors rather than through venture capital and angel funds. This has been called the “democratisation” of funding, but not only has the source of the funds changed, the process has also changed and what you are buying has too.
Under the traditional process to raise the kind of money that is now being raised by ICOs went from raising money from family and friends, probably a bank loan, through angel investors, onto venture capitalists and IPOs. Crowdfunding has changed this a bit and allowed individuals to invest directly rather than through funds, but there is still a lot of investor protection regulation in place.
That seems very long winded process compared to an ICO (have an idea; write a white paper; launch an ICO), but it had sound underpinning. Each step undertook a level of due diligence. Family and Friends must at least trust you to some extent. A bank will look at your business plan, accounts and history and probably ask for security, so testing your commitment to the business. The angel will really take a good look and get to know you. The venture capitalist will put you through the mill.
Also, the business has been developed throughout the process. By the time you get to the angel and venture capitalist there is usually a functioning business in existence. Compare this to a lot of companies who don’t even have a prototype available when they announce their ICO.
The other key difference about this process is that, apart from the bank loan, these people will actually own a part of the business. They will be shareholders and have some say in how the business is run.
One of the major things about the tokens being offered in ICOs is that they are for use in the service being proposed and NOT an investment in the company. This is what get’s them away from current investor protection legislation but one of the consequences is it also removes the provider of funds from any direct input on how the company is run. A lot of effort and convoluted thinking has gone into working out how a service can be tokenised whether it needs it or not, but that is for another article.
What you are buying is the right to use future services. For the value of your tokens to increase you are reliant on the company increasing the demand for its services. A strategy you have little control over. The white paper is a sales document and what the company decides to release is not regulated (yet). For the investor the integrity of the team becomes paramount.
The position can be summarised by this chat (shortened and anonymised) in a Telegram channel for token holders:
token holder: Can you tell me …..
company: Well we are a private company so right now that is what we can share
token holder: Just want to make sure you have some accountability
company: yes but no one here is a shareholder
token holder: I said stakeholder on purpose.
company: this is a token, not a piece of the company….
So one of the advantages for the ICO issuer in that when you raise funds this way you don’t, on the whole, give away any of the equity. On the other hand an ICO is a sale, so could have unexpected tax consequences (Sales tax anyone?).
For the investor, just know what you are buying for your money and do lots of research.
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© copyright 2017 Russell Weetch