The DotCom heyday that started in the late 1990’s and continued into the early 2000’s brought about the prominence of the Initial Public Offering (IPO). Many believed this to be a golden opportunity to get in on the ground floor of a company’s stock as it was going public for the first time. What many did not realize is there were many insiders who had options to buy those shares at a discount prior to the actual IPO. These were the investors who really cashed in.
When ICOs became all the rage a few years ago it was somewhat reminiscent of the IPO days described above. People wanted to feel like they were getting a jump on everyone else and get a massive amount of coins for a relatively low amount of money. Everyone wanted to become the next Bitcoin millionaire.
In this article we are going to walk through the evolution of ICOs, STOs, and talk about what may be the next instrument for raising funds in the cryptocurrency world.
What is (was) an ICO really?
Initial Coin Offerings (ICOs) were a sale of utility tokens to a wide range of potential investor classes. Because the tokens granted the holders no ownership status or rights to any profits generated by the company, these sales were exempted from securities regulations. This means that basically anyone on the planet could participate without having to be an accredited investor.
The tokens could really only be used with the ecosystem created by the company for products or services offered. Individuals buying these tokens during the ICO were speculating that there would be increasing interest in the project and a corresponding increase in the value of the token. With many tokens being offered for less than $0.05 per token it would not take very much movement for holders to realize significant profits on the secondary market.
ICOs were the new gold rush for newbie crypto investors and especially for companies wanting to raise large sums of money during an ICO to fund their project. Overnight whitepapers were popping up across the digital landscape, all with grand plans to disrupt an existing market or create entire new ones.
Many of these projects were legitimate and were able to actually deliver the product, service, platform, or ecosystem they outlined in their pitch to investors in their ICO. In this case, many investors did do quite nicely and make significant profits depending on their entry price and whether they decided to exit or HODL.
Unfortunately, there were also many bad actors who had little to no intention of completing the development of their project. Their sole intention was to simply raise millions of dollars and disappear into the digital background. All it really took back then was an impressive website, a group of founders and advisors who appeared legit, and a whitepaper that detailed their grand plan to rule the world.
ICOs and Capital Raised
2014: 7 raised $30,000,000
2015: 7 raised $9,000,000
2016: 43 raised $256,000,000
2017: 343 raised $5,482,000,000
2018: 650 raised $16,718,000,000
WIth numbers from the first half of 2019 now being fully reported, there has been a precipitous drop-off in all ICO activities. In the first 6 months of 2018, ICOs raised over $6 billion. The numbers so far for 2019 represent a 95% decrease.
Is the ICO officially dead in the water now? The gold rush days are over for the speculators, but if done with integrity there is still a place in the cryptocurrency landscape for ICOs as a means of raising capital for real-world projects where a utility token would be the best option.
Are STOs the next ICO?
Let’s start by defining an STO and how it differentiates from an ICO. Security Token Offerings (STO) are just as the name implies, securities. Owners are granted an interest in the company that can be secured by real assets of a company such as stock, dividend distributions, or voting rights. Based on these characteristics the SEC treats these investments the same as traditional securities.
Even though STOs are relatively new, there have emerged three different types of security tokens that are being offered:
Equity Token: Treats the token exactly like stock shares in a company.
Reserve Assets Token: Tokens are protected by a reserve of assets (Gold, Real Estate, etc).
Debt Token: Issued as a promissory note for future repurchase of tokens from investors.
ICO’s require no formal registration and many have come under intense scrutiny in many countries around the world. STOs have taken crypto fundraising out of the shadows into the full light of regulatory authorities. To be listed and sold in the US an STO must meet the full compliance of SEC regulations. This provides many more protections for investors while also significantly increasing the legal costs of establishing and launching a successful STO.
These same regulations also limit who may invest in an STO. A properly registered STO in the US only allows accredited investors who have made $250,000 the previous two years or have assets exceeding $1,000,000. STOs aim to attract large investors that will make large contributions, while ICOs were built to draw in the largest possible number of investors.
With ICO investment falling off the cliff, many experts felt that 2019 was going to be the breakout year for STOs. Many organizations with plans for ICOs or offerings that did not take-off have shifted over to the STO model. Many STO projects are merely re-branded ICO projects. That is not necessarily a bad thing. With all the regulatory requirements and legal expenses it will weed out most of the bad actors who never had an intention of following through with their projects.
STOs seem to be off to a solid start in 2019. Historically, ICOs only have a success rate of meeting their capital raising objectives 41% of the time. STOs on the other hand are posting a success rate above 90%.
Initial Exchange Offering (IEO)
When tokens were sold during an ICO it would take some period of time before they could be listed on an exchange were investors could begin to buy/sell them. Many ICOs that raised millions of dollars were never listed on any major exchange.
An IEO represents a partnership between the token issuer and the exchange prior to the sale. When the sale takes place it is completed on the exchange and is immediately available for buying and selling activities. There are already more than a dozen exchanges that are in some stage of executing an IEO on their site.
The only requirement for buyers is that they be a verified user on the exchange. You would not need to be an accredited investor to participate in an IEO. This model provides some additional vetting to insure that the project is legitimate and meets the parameters spelled out by the exchange to utilize an IEO on their platform. The exchange has an inherent interest in making sure that their users are not left holding tokens with zero value that never had a chance to be successful.
What’s next?
As the crypto market matures, comes under more regulatory scrutiny, and attracts institutional investors; it makes complete sense that more refined fundraising and investment vehicles will be developed.
ICOs represented the days of the Wild West where anything goes. STOs were the sheriff riding into town and establishing a sense of order and safety. Initial Exchange Offerings (IEOs) are yet another means of investing that is starting to make a bit more noise in the market. While the initial boom days are probably behind us, there will continue to be new and interesting ways for billions of dollars to find their way into the cryptocurrency market.