Remember the good ol’ days, like 2016, when the focus on alternative funding for start-ups was on the revolutionary avenues of crowdfunding and peer-to-peer lending? Well, 2017 saw the rise of yet another way early-stage companies can get the capital they need to grow and thrive. The Initial Coin Offering (ICO), through which companies use “cryptocurrency” similar to Bitcoin to raise money, saw explosive growth in 2017. According to Coinschedule, a cryptocurrency tracking site, over $3.6 billion has been raised through ICOs year-to-date for 2017.
That is a ton of money raised in very little time through a method many if not most start-up founders don’t understand or may never have heard of. If you are intrigued by ICO’s as a potential source of funding for your company, here are three things you need to know as you explore the possibilities:
- What is an ICO?
Let’s start with the basics. You likely have heard of Bitcoin, the virtual currency. Bitcoin and other cryptocurrencies are created and regulated through encryption techniques which can be unlocked by users to access the currency. Once a user has access to the currency, they can use it to either buy or sell goods and services or exchange it for legal tender such as dollars.
An Initial Coin Offering involves a company creating its own cryptocurrency, sometimes referred to as “tokens.” The company sells a percentage of the cryptocurrency to early-stage investors in exchange for actual cash or for more widely traded cryptocurrency like Bitcoin.
As Investopedia describes the ICO process:
“ICOs are similar to IPOs and crowdfunding. Like IPOs, a stake of the startup or company is sold to raise money for the entity’s operations during an ICO operation. However, while IPOs deal with investors, ICOs deal with supporters that are keen to invest in a new project much like a crowdfunding event. But ICOs differ from crowdfunding in that the backers of the former are motivated by a prospective return in their investments, while the funds raised in the latter campaign are basically donations. For these reasons, ICOs are referred to as crowdsales.”
- How Can I Launch an ICO?
Starting an ICO is similar in many respects to launching a crowdfunding campaign. You need to have built your company to an early yet viable stage, announce your plan to launch an ICO, and have a business plan or white paper that advises potential investors about your company, its products or services. Then, you can launch your new cryptocurrency through a service like CoinList or Waves.
- What Are the Risks of an ICO?
In many ways, the purchase of virtual currency in an ICO is like the purchase of a security. But as with many financing and technological innovations, ICOs have advanced quicker than the law or regulatory bodies can catch up with them. But that is quickly changing.
In July 2017, the Securities and Exchange Commission issued a ruling that some “tokens” actually are securities subject to SEC regulation and “that issuers of distributed ledger or blockchain technology-based securities [such as those offered in ICOs] must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws.”
Be sure to weigh benefits and risks of raising capital through ICOs (H3)
No doubt, ICOs are an exciting development in start-up funding. But determining whether an ICO is right for your young company, and evaluating the rapidly evolving market, risks, and requirements for issuing such cryptocurrency, requires careful consideration and consultation with experienced legal, financial, and accounting experts who can provide the proper guidance.
If you have any questions regarding ICOs and your start-up’s funding needs, please contact us. We welcome the opportunity to assist you.