By now you’ve undoubtedly heard of Initial Coin Offerings, or ICOs, the hot new strategy entrepreneurs are using to collect funds for their projects spanning a swath of industries. ICOs are quickly becoming an enticing development vehicle for startups, and several cryptocurrency exchanges present interesting opportunities allowing backers to support the latest tokens should they choose to.
Token sales are rapidly replacing legacy methods of providing initial support for promising startups, and both startup founders and backers are increasingly adopting and embracing this alternative tool to drive their innovative projects. The sector is booming. CoinSchedule.com reports that this year just 137 ICOs generated over $1.85 billion in the United States alone, and this momentum shows no signs of stopping as more entrepreneurs flock from legacy models to token sales.
So what is an ICO? The Economist defines ICO ‘coins’ or ‘tokens’ as “essentially digital coupons, tokens issued on an indelible distributed ledger, or blockchain, of the kind that underpins bitcoin, a cryptocurrency. That means that they can be easily traded, although unlike shares they do not confer ownership rights.”
Three of the largest cryptocurrency ICOs to date include Tezos, which pulled in a record $232 million USD in Bitcoin-BTC and Ether-ETH, EOS (Stage One) which achieved $185 million USD, followed by Bancor which collected more than $153 million USD in ETH – in record time of under three hours. And while most token sales support projects in core infrastructure, payments, finance, and gaming sectors, ICOs have also driven blockchain-based projects in the fields of arts, entertainment and real estate - just to name a few.
In addition to widespread uptake on token sales by individuals, Goldman Sachs Group Inc., in a recent note to clients, acknowledged that it is getting increasingly difficult for institutional backers to ignore a cryptocurrency market now worth an estimated $120 billion, with initial coin offerings now outvaluing established venture capital angel and seed stage funding in 2017 to date.
According to Nick Evdokimov, a co-founder of ICOBox, the world’s first SaaS ICO solution provider, their company receives over 50 ICO requests per day, and he anticipates that this demand will grow dramatically as governments, enterprises and businesses adopt blockchain solutions.
The phenomenal growth in ICOs is enabling countless entrepreneurs with compelling ideas to tap into the support of interested communities. As ICOs creep into the mainstream, the ability of entrepreneurs and protocol developers to find an alternative to the traditional VC and accredited investor route represents a seismic evolution in democratizing access to innovative projects. New ventures can now go straight to interested communities who are incentivized to support their project.
The evolving regulatory landscape
Along with increased interest from market participants and the institutional backers, the dramatic growth in token sales has also attracted the attention of regulatory bodies worldwide.
Recent rulings by Canada’s Ontario Securities Commission, the U.S. Securities and Exchange Commission (SEC), and Chinese authorities have placed ICOs firmly on regulators’ radar. But as token sales differ markedly according to each project’s offering, there exists a need to firmly separate out those tokens which might be considered a ‘security’ and therefore subject to regulation in most jurisdictions, vs ‘utility’ or ‘product’ tokens which are not.
Doubtless in recognition of the increasing importance token sales represent in driving blockchain innovation, regulators, while monitoring the sector, are taking a measured approach to enacting new legislation. Even China modified its initial stance of outright banning ICOs to later hint that the ban is temporary and the country will likely resume ICOs in the future, after establishing licensing regulations.
So, what should you know before participating in an ICO or token sale?
With token sales supporting projects across a growing number of sectors, there’s something for everyone interested in blockchain and cryptocurrency projects. As with any business undertaking, one should conduct their own due diligence prior to participating in a token sale. So what elements should you consider?
- Gain an indepth understanding of what the project entails. Is the product or service robust? Is there a compelling case for its development - does it address a real, significant problem - or is it a solution looking for a problem to solve?
- How far along is the development and what technical milestones have been reached?
- Not all teams are created equal. Who sits on the executive team and are they technically strong? Do they have the requisite background, depth and breadth of experience, and sector expertise to ensure the best possible chance of long-term success? Are they legally savvy and compliant with the law?
- Read and understand the White Paper that details the product or service - its timelines, legalities, terms and conditions, restrictions
- Is there a lock-up period on selling your tokens?
- Is the code posted on Github?
When it comes to buying and selling your tokens, do your due diligence again to select a reputable platform that complies with regulations. Working with tokens allows you to continue to explore the advantages of this exciting new landscape. With the knowledge of how ICOs operate under your belt, there’s no better time to begin participating in token sales.
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