[bctt tweet=”“Everyone thinks of changing the world, but no one thinks of changing himself.” – Leo Tolstoy” username=”@jamesvandieman”]
(Courtesy of Goodreads – https://www.goodreads.com/quotes)
Since the advent of Blockchain and then Bitcoin, there has been so much change and such frequent change in the Fintech (financial technology) sector, that participants and investors alike can be forgiven for exhibiting whiplash like symptoms, or looking like deer in the headlight of an oncoming lorry.
Change in and of itself is not bad. Change for changes sake is not sustainable. Changing to something better that represents more value usually is.
And so it has come to pass that in just a few short months, I’ve witnessed a radical and I think permanent loss of confidence in the recent trend of Blockchain and Crypto companies raising oodles of money fast via ICOs (Initial Coin Offerings).
The numbers are staggering. A recent Bloomberg article highlighted the new (down) trend, reporting that ICOs raised $300 million in August 2018. This is the lowest level of funding seen in the past 16 months, a mere one-tenth of the average monthly funding volume ($3 billion) in the first quarter of 2018.
So why the sudden drop? They were still in their infancy…just toddlers in the bigger scheme of established fundraising and on the flip side, established investment products.
Darren Marble from Issuance explains it this way – “It turns out that hundreds of ICOs in 2017 showed clear signs of fraud, with an estimated $1 billion of the $6 billion raised globally going into highly questionable deals.”
An article posted in The Wall Street Journal seems to add weight to that observation.
There were other factors at work. The whole space became grossly over hyped. Even serious and sometimes experienced Fintech Teams were often willing to push the envelope when it came to their “forward-looking projections”. Fact is, they could not tell what the take up of their product or service would look like. No one could. On the flip side of that image you had a largely uneducated (in a blockchain/crypto/business sense) pool of investors willing to put money into any ICO as they expected/hoped/believed and in some cases could point to a previous case (imperical evidence!) where an ICOs initial value had multiplied 10x or 20x or more in a short period.
There’s a saying that I have never forgotten that was handed down to me by a grizzled old Floor Trader at the NYSE. In times of crisis when the market defied logic and the mood turned to fear, he would say…
Market Wisdom – “Bulls and Bears Will Always Survive. Only Pigs Get Slaughtered!”
And an additional brake on the runaway ICO train cam about when regulators, especially in the USA and other markets where a large majority of the funds had been raised, started entertaining the idea of framing regulation to set out the terms and conditions under which ICO promoters could “sell” their tokens to the investing public.
…”So at the intersection of GREED, EGO and OPPORTUNITY streets, there was a major pileup, and a lot of investors did not survive.”
The Dawn of Digital Securities
It is true that venture capital funds have stood behind many mind-blowing success stories and major disruptions of our age. However, the system itself has barely changed for the past 60 years, and right now venture funds represent rather rigid institutions. The whole venture industry is an elite limited-access club ecosystem that sets strict rules and limits to both investors and startups. These limits become harder and harder to deal with as the world moves on in its digital paradigm, starting to outweigh the benefits.
Still, VC remains a financial industry which powers humanity’s tech progress. To what extent STO can change — or maybe even replace? — this strategically important sector of the fundraising industry, we are just about to see.
Digital securities (sometimes referred to as security tokens) are digital assets that are compliant with federal securities laws and run on the blockchain. Security Token Offerings, or STOs, are a compliant alternative to ICOs—and they’ve recently been gaining momentum in the U.S.
STOs can be run using securities exemptions like Reg D, Reg A+, Reg CF and Reg S. Currently, the most common exemption being used is Reg D 506(c), which allows STO issuers to generally solicit or market their deal and raise an unlimited amount of capital–but restricts investment to verified accredited investors.
The beauty of a STO is that any company can run one: a startup, an enterprise, a blockchain company or non-blockchain company. Like ICOs, STOs promise near-term liquidity, with several regulated trading platforms like OpenFinance Network, tZERO and Templum either live or in development.
The majority of projects don’t need their own token – they just need investments.
According to ICORating research only 3% of all tokens issued during ICO campaigns in 2018 are true utilities. Over 65% (!) function only as a payment form and can be easily replaced by fiat with no damage to the project’s economy.
Now let’s take a look at investors: they really seldom buy tokens during an ICO campaign in order to buy services of a particular (and yet non-existent) application in a year or two. They do so to gain profits. Which is, by the matter of fact, can be considered as an indication of a security.
Doesn’t matter if you called it a “utility” in your white paper – if it is a security, it has to comply with corresponding regulations. If you do not – get yourself ready for the legal consequences that might come.
STO solution: when doing an STO, founders do not have to invent a use case for their token within their platform/product/service in order to raise investments. Security tokens constitute financial instruments, backed by a particular asset (equity, debt, real estate, etc) and are fully compliant with all legal requirements.
The Way Forward
It’s hard to see ICOs shutting down completely. There are so many great products and services that deserve to get funded, and their seems to be an insatiable appetite from the investment community, to take a high investment risk, as long as the (potential) monetary reward is greater – i.e. what is known in the investment industry as a risk reward ratio.
However, it is more likely that with the onset of regulation, those teams/promoters that were looking for a quick buck will be out of the game, those that have a credible story to tell and will not be deterred by having to cope with a bar that has been set higher will be the ones creating and distributing future ICOs.
One thing is certain, we will continue to see more and more STOs enter the market. And that is a good thing.
Every toddler has to grow up and stand on their own two feet.
This fledgling industry is about to do exactly that.
How Can We Help?
I head a small team of Fintech and in particular Blockchain Evangelists, whose combined global network comprises the “who’s who” in this space.
We can be your STO Guide before you appoint and STO Advisers. Contact me. For a modest fee, we can assist you to find suitable candidates, or help you vet your existing shortlisted ones.
The additional benefit that we offer – we can also reach out to our network of institutional investors. That will shorten your fundraising time frame and provide you with industry credibility, and also allow you to raise more funds quickly when you need to invest in more development or add to your headcount.
Start by subscribing to our newsletter below. We’ll respond and start a dialogue.