In a record-breaking fundraising round, a new blockchain startup raised $4 billion without so much as an existing product. The effort was the largest initial investment offering of 2018 and raked in more than twice the largest pre-existing offering of that type. The venture, Block.one, raised capital for a blockchain framework called eos.ios using an initial coin offering (ICO).
The startup doesn’t plan to launch its product until June 01, 2019, and investors have no idea how the company plans to use the collected funds. According to analysts, the startup founders have put themselves in a position where investors will be expecting exceptional results.
Surprisingly, investors have been throwing money left and right at ICOs, especially Block.one’s recent offering. However, instead of trading stock ownership for capital – as with IPOs – initial coin offerings finalize investments with cryptocurrency and a promise.
On Wednesday, September 19, 2018, Block.one’s fundraising round brought in $7.12 million by the end of the business day. The next day, the fledgling firm managed to boost that amount to $4.1 billion. With this fast and massive investment, speculators are also gambling on the value of ether cryptocurrency once the deal is finalized.
Leveraging Digital Coin for Startups
Many believed that initial coin offerings were going to be a short-lived fad. Contrary to this belief, ICOs have compiled a combined revenue of $3 billion on top of Block.one’s recent windfall.
Any organization can launch an ICO – technically. The fundraising method isn’t limited to startups who want to launch a new cryptocurrency. However, there are some things that entrepreneurs must consider before deciding to use an ICO to fund their venture.
For those considering using cryptocurrency to launch a new enterprise, they must consider whether to issue tokens as an investment or utility, whether to offer centralized or decentralized services and whether the services or products will be fungible or exclusive.
Some regulatory agencies treat ICOs as currency and use the Howey test to determine whether to treat them as an investment vehicle. Investment tokens are meant to be held by speculators, while utility tokens give investors access to goods or services once they become available.
Fundraising entrepreneurs must also decide whether to back the value of their offering with a centralized entity, such as a corporation, or back their ICO using proprietary cryptocurrency. Additionally, fundraisers must consider whether to issue tokens that are liquid, or fungible, or whether to offer tokens in exchange for specific, limited proprietary services or goods.
Is an ICO Right for You?
For those who are determined to use an ICO to launch their startup, the vehicle can provide fast funding with little regulatory hurdles. In a sense, initial coin offerings are a startup shortcut, which allows entrepreneurs to generate revenue before launching the company or generating any revenue.
While ICOs can deliver vast rewards, they’re still a fledgling, high-risk investment. Entrepreneurs are successfully launching firms using initial coin offerings, but the vehicle offers poor liquidity, for now.
With the introduction of ICOs, the financial industry is currently experiencing disruptive change, much like the relatively recent transformation in healthcare. Financial analysts liken ICOs to the Wild West, recommending that speculators stick with venture capital investments until this new market stabilizes. Despite this warning, it will be wise to keep an eye on the ICO market, as it has the support of many leading technology and financial leaders around the world.
So far, the “digital graveyard” is littered with stories of lax ICO quality control and fraudulent offerings. In fact, 46-percent of 2017 ICOs failed by February 2018, taking with them $104 million in raised capital.
Most of the failures lacked leadership as well as sufficient cash flow. Unfortunately for vested stakeholders, the investment vehicles aren’t currently regulated, and there’s little to no recourse for this outcome.
Making It Happen
For those who are determined to leverage this cutting-edge investment vehicle to launch their enterprise, there are venture capitalists who prefer to speculate in initial coin offerings. One reason is that they can cash out early compared to IPOs – although if the enterprise fails, they’ll never get to cash out.
Entrepreneurs who use this innovative new vehicle should plan to spend $500,000 in legal fees. Still, this is relatively inexpensive compared to IPOs, which can cost $5 million or more to launch and typically eat up 7-percent of fundraising.
One firm that aims to reduce the cost of fundraising through initial coin offerings is iComplyICO. The company provides due diligence and compliance services for startup entrepreneurs who fund their ventures in this way.
For those who still believe that an ICO is for them, the first step is to consult with a legal counselor whose experienced in this kind of fundraising. Would-be capitalists can launch a venture with less legal wrangling and costs compared to an initial public offering. However, it’s important to do it right.
Case in point, in an extreme example, the Securities and Exchange Commission (SEC) recently penalized REIcoin Group Foundation and DRC World for fraud. The former enterprise led investors to believe that their offering was backed by real estate, while the latter did the same with diamonds. In actuality, neither firm had secured their ICO offerings.
Like the relatively recent epic battle between Apple and Google over smartphone operating system dominance, industry experts forecast that a hellacious war is brewing in the ICO industry. Major players are hiring competing developers to code decentralized applications to tether to new offerings. However, instead of two competing firms, predict analysts, the near future could hold a knockdown, drag out fight between potentially 10 opposing corporate monoliths and ongoing, messy legal wrangling.
Block.one truly gained a competitive advantage through their recent successful fundraising initiative. The financial cushion will help the new enterprise weather most early challenges. Company heads have already vowed to spend $1 billion on developer recruitment and billions more on lobbying and relationship building with financial institutions.
As the ICO market stands, analysts suggest that the ideal endgame for fundraising entrepreneurs is to collect as much startup funds as possible. In this environment – express analysts – it seems that whoever can raise the most capital is the winner. While the ICO landscape is paved with uncertainty for investors, for now, they’d do wise to take a close look at the issuing company leaders, just as they would when investing in traditional startups.