ICO Resources

Joshua Cook and Mike Heath are corporate and securities partners at business law firm Gunderson Dettmer, where they specializes in the representation of emerging growth companies and private equity investment funds.

In this opinion piece, Cook and Heath give their view on developments in the fast-growing blockchain use case, noting the ways the tech augments the traditional fundraising process – for better and worse.

Are ICOs ready to disrupt the VC world? Spoiler alert: not yet.

I've spent my entire career doing venture deals for tech companies and I know the good, bad and ugly of fundraising. I've also seen private company shareholders, frequently small ones, stuck holding onto private company stock because there's never been an efficient way to sell it.

Token sales may just change all that.In the bad ol' days (i.e. like six months ago), the development path for a software startup looked a bit like this:

• Step 1: Incorporate
• Step 2: Build team and product, generate revenue and huge user base
• Step 3: Entice a VC to buy ~25% of your equity
• Step 4: Repeat step 2 and step 3 at increasing values and bigger user base numbers until you can sell the company or take it public.
  
  

Token sales (also known as initial coin offerings – although your lawyer hates it when you call them that) seem to offer a great hack.While VC firms expect to see a functioning product before investing, some software companies are raising millions on a white paper.

And while not every project is an obvious choice for blockchain, certain network effect companies that once relied on scale to attract VCs are short-circuiting the process by selling tokens instead – in some cases raising 10x the value in 1/10 the time.

That inverted math has many firms and investors struggling to figure out if they should get in on the token rush.

Advantages and risk

Tokens have some compelling advantages over a conventional equity financing for both issuers and purchasers:

• If it's not a security (and that is the $64 billion "if"), you can make a public offering with press. Securities laws restrict most traditional venture financings only to accredited investors and prohibit publicly marketing the offering to drum up demand.If offerings were opened up to anyone with an internet connection, it might democratize venture investing the way Facebook democratized news editors (for better AND for much worse). It could also unleash the long tail of the retail buyer – although there’s certainly a policy discussion to be had about whether that’s a good thing.
  
  
• Tokens are liquid. So long as there is a functioning crypto-exchange, tokens are much more liquid than private company stock. And because crypto markets are more transparent, you're actually able to see global asset prices in near real-time. Private company equity markets are more or less totally illiquid. The transactions that do occur are typically complex, slow and comparatively large.
• 
  

But, and it's a big but...

• It can be very tax inefficient for issuers. When a company sells equity to raise money, it doesn't pay any income tax on the proceeds. When a company raises money through a token sale, the proceeds are treated as revenue, and therefore subject to tax. In the U.S., you'd expect to pay roughly 40 percent of every dollar raised. While some sales may be structured through tax-exempt and/or offshore entities, that structuring is more expensive, more complicated and riskier than a traditional venture financing.
  
  
• Issuers have little regulatory certainty (i.e. you might not know that you're breaking the law, but ignorance won't be a defense). Even after the Securities and Exchange Commission (SEC) weighed inwith the catchily titled "Release No. 81207 / July 25, 2017: Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO," there is still significant uncertainty as to whether a token is a security. The SEC declined to provide a bright-line test, instead emphasizing that each sale must be considered individually.
  
  To further complicate matters, while the focus to date has been on the SEC's position, the SEC is not the only potential actor in enforcing securities laws. Plaintiffs' attorneys, state attorneys-general and state securities commissioners will all take an active interest in these sales. In response to the regulatory uncertainty, we are seeing projects like Filecoin voluntarily choosing to run its SAFT offering in compliance with Rule 506(b) and Rule 506(c) for their pre-sale and public sale respectively (i.e. accredited investors only.)
  
  
• If an issuer is trying to "do it right," a token sale is (as of now) slower and more expensive than raising an equity round.
  Many projects are providing their buyers with a terms-of-sale document, which reads like a mini-IPO prospectus. Preparing one is a fact-specific undertaking that needs to be tailored to each project. This costs money.
  
  Since these token sales are often global offerings, more risk-averse issuers choose to run regulatory and tax analyses for each jurisdiction they may sell into (e.g. Japan, Canada, Germany) as well as the U.S. This costs more money.

• You're a token holder and you lost your private key? Oh well. In conventional financings, the issuer is a trusted third party. If you lose your stock certificate, the issuer will almost always give you a new one if you pinky swear that you really lost it. But if you lose your private key for your wallet or if your wallet is otherwise compromised, welp ... that sucks.
  
  
• While it's axiomatic that "trusted third parties are security holes," in my experience, there's often another security hole, and it's sitting between the chair and the keyboard. Multi-sig wallets and other innovations may help blunt the risk of loss for a token holder, and people might be more careful with the assets if they know there's no pinky swearing in crypto, but only time will tell. One thing that we know for sure is that there's no "lost crypto affidavit."

A financing model without VCs?

But let's assume that the market gets comfortable with the drawbacks around a token sale; the SEC gives clear guidance that token sales aren't securities offerings, and public token sales displace conventional venture financings – at least for certain software companies. In that future world, venture capitalists will be totally disintermediated, right?

I'm not so sure about that. Venture funds already provide something of a curation function in the Wild West of token sales. Filecoin notably (and not without controversy) ran a pre-sale with a number of top-tier venture funds participating. Likewise, Bancor touted Tim Draper's involvement with its token sale.

Rightly or wrongly, a particular fund's participation in a token sale seems to give a project a stamp of legitimacy.Although anecdotal, I am seeing people (myself included) drawn to token sales who do not have the technical chops to evaluate a white paper.

Proof-of-spacetime sounds amazing, but let's be honest, I don't know if a "tuple of polynomial-time algorithms" is the right approach to the problem because I don't know what a "tuple of polynomial-time algorithms" is.

But if I know that the venture funds that backed the companies that built the internet are backing a particular blockchain project, then maybe I'll defer to their opinion on polynomial-time algorithms.

The token sale phenomenon has incredible potential, but it's still in its infancy. I can imagine a global token market parallel to conventional equity markets with similar liquidity and speed of execution.

Sure, token sales have...continue reading: 
https://www.coindesk.com/token-sales-compelling-advantages-real-risk/

As countries such as the US, China and Hong Kong are progressively tightening regulation around crowdsales and initial coin offerings (ICOs), the UK has the opportunity to create a regulatory framework that is conducive to innovation and attract the world’s most forward-thinking businesses, according to Barry James, the co-founder and CEO of the
Crowdfunding Centre

.

Barry James, founder and CEO of the Crowdfunding Centre
Speaking ahead of an All-Party Parliamentary Group taking place at the Houses of Parliament today, James urged the UK Financial Authority Conduct to ensure that the regulation of ICOs does not jeopardize the opportunity that blockchain brings.

“Regulators across the world seem to be in a collective state of mortal panic about ICOs and crowdsales,” James said. “While this is understandable given their naturally conservative natures it increases risk rather than reduces it. Not only that, it risks killing a truly golden goose which could otherwise benefit us all long into the future.”

“The implications of blockchain technology are immense, and the applications are as exciting as they are diverse. Programmable, ‘smart’ money will be integral to our future lives, streamlining processes in every industry.“ICOs and token sales provide a way to fund the positive innovations we need, and businesses need an alternative source to the banks.”

London-based blockchain startup Etchis about to launch its ICO to fund the development of an Ethereum-based real-time employee remittance platform targeted at the construction industry.

The solution will allow employers to pay their employees in real-time and reduce the need for payday loans and other such instruments to plug spending gaps. It will use blockchain technology to unify payroll and remittance services to create a platform that not only benefits employees in their lives, but reduces business inefficiencies, saving them time and cost in payroll.

Etch co-founder Euros Evans will be joining James at the joint meeting today to debate several topics around ICOs, token sales and crowdfunding. In particular, James and Evans will lead a discussion on how the UK can ensure that its regulatory framework created the conditions that the next generation of blockchain entrepreneurs need in order to thrive.Referring to Etch, James said:

“This business would have been impossible without blockchain technology.“By supporting firms like Etch, the UK can reduce its reliance on the huge, old-fashioned financial services firms and banks, with all the complexity costs and friction they bring.”

The meeting at the UK Houses of Parliament comes at a time when jurisdictions around the world are looking to regulate ICOs. Last week, the Chinese central bank banned ICOs and is reportedly investigating platforms that facilitate them.

Meanwhile, in Japan, startup Tech Bureau is preparing to introduce a new platform built on the NEM blockchain called COMSA that covers nearly all aspects of the process of an ICO. Last week, the startup raised US$15 million from Japan’s largest VC firm JAFCO to kickstart its plans....

Discover more stories like this on Coinjournal here: https://coinjournal.net/ico-regulation-industry-experts-urge-uk-fca-not-stifle-innovation/

The Initial Coin Offering (ICO) market is going through a turbulent period of change and regulation. Following an incredible rise of the new form of raising capital online, regulators around the world are pumping their rule making breaks to slow down cryptocurrency based securities offerings.

Starting with the US Securities and Exchange Commission in July, followed by multiple securities regulators across Asia and elsewhere, government officials are warning both issuers and investors about the risks of ICOs.

China, a huge player in the cryptocurrency space, rattled the digital coin world when government officials effectively banned domestic ICOs altogether. So is this the end of the tokenized joyride? Will early stage companies need to go back to less exciting debt and equity to capture necessary growth capital? Are the days of $100 million ICOs over?

Hard to tell, at least for now. Regulators are not necessarily saying ICOs are outlawed offerings. They are saying they need to follow the rules. This is an important step in the legitimization of cryptocurrency based securities that may, in the end, be a positive catalyst for the future of crowdfunding.

Currently, there is plenty of opinion and speculation as to what might occur next. Crowdfund Insider reached out to Stelian Balta, founder and Managing Partner of Singapore-based  HyperChain Capital, for his perspective. HyperChain Capital is described as a digital assets hedge fund focused on blockchain based projects, decentralized protocols and ICO’s.

A quick view of their portfolio page shows a who’s who of prominent ICOs from recent months. Balta remains staunchly optimistic about the ICO market – even as it slows. He believes recent governmental actions are part of a natural and healthy evolution for the future of digital asset investment.

 Crowdfund Insider asked Balta several questions about the recent regulatory moves and his opinion on the future of crypto-securities. Our discussion is below. The announcement that China has pushed pause on ICOs was not completely unexpected as government officials have been messaging this move in the past couple of weeks.

How will this impact the Asian ICO market? What about the Global ICO market (as many offerings are pan-national).

Stelian Balta: I think PBoC’s decision is coming in a moment of irrational exuberance, where low quality projects and anything related to “ICO” and “blockchain” concepts attract a lot of funding. This is not sustainable. More jurisdictions will regulate and we welcome that. We need protection for users/investors and we need rules for growing a healthy ecosystem.




What will the impact be on the price of the various digital currencies?

Stelian Balta: There was an expected sell-off in the digital assets market, but this is temporary.  The market is starting to recover, being very sensitive to news from China. The digital assets market is a nascent market, we are only at the beginning and we expect a lot of turbulence and also exuberance in the years to come.

The Chinese government expects to issue new rules concerning crypto and ICOs by the end of the year. What are your expectations for these new rules?

Stelian Balta: We, at HyperChain Capital, as investors and advisors, are looking very closely to the ecosystem and important jurisdictions, like China. We think that having investor protection mechanisms and other regulations are important to curb the proliferation of projects raising money with only a whitepaper and promises.

China has been largely supportive of Fintech in general. Has Crypto / Tokenized offerings caught them off guard?

Stelian Balta: China is looking very closely towards the Fintech and digital assets markets. I think the rules are to curb proliferation of low quality projects, bad intended projects or scams.




Will China’s regulatory actions create opportunities for other jurisdictions?

Stelian Balta: Singapore and USA made great first steps in regulating ICO’s and more jurisdictions are following (Hong Kong, etc). We need standards, we need rules. With proper rules, the ecosystem will grow much bigger.

Once the dust settles – will ICOs return in force? Is this the future of early stage funding? Is there risk of a bubble?

Stelian Balta: I think we are at the early stage of the digital assets market. It’s the first asset class natively born on the Internet. We have a long long way to go. In any market there are risks of bubbles and I think we are very far from that. Why? Because we’re starting to see real use cases of projects financed using ICO model.

The dotcom bubble was only in the USA and from that bubble, important companies like Amazon, Google, etc emerged. The digital assets market is a global market in an age where billions of people have access to the Internet for information and now also for storing value.

I am very optimistic about this new asset class and I think it will reach $1 trillion in less than 2 years.

Discover more stories like this and more from Crowdfund Insider: https://www.crowdfundinsider.com/2017/09/121499-icos-predicted-rise-1-trillion-less-2-years/