In under 30 seconds, Brave, a browser startup, raised an eye-popping $35 million from investors. Tenx, a fintech startup, raised $34 million in under 7 minutes. Status.im, a messaging app, raised $100 million in under three hours. What explains these record financing times? Three words: initial coin offering (ICO).
Landing a meeting, pitching your idea and negotiating fair deals with VC firms can be very difficult. Investors ask for too much stock and eat away your equity. Employees stock options are sometimes no better.
An IPO is no longer the only exit strategy. Fewer startups choose to go public. Only seven venture backed tech startups have gone public this year, down from 39 in 2014.
The ones that do go public raise less money than expected while at the same time remain under the thumb of their VC backers. The recently public startups Blue Apron, Oscar Insurance and Square Inc. have felt the pinch.
Regardless, you need capital. Now there is an alternative way to raise funding called ICO. ICO stands for Initial Coin Offering and can help you raise money quickly while preserving your equity. The market for them has already exploded to over $1.2 billion and 94 launches this year, up from $102 million and 69 launches last year.
ICOs offer you a way to preserve your autonomy, raise capital and realize your vision. In this post, we’ll explain what ICO is and how to launch one.
To understand ICOs, you need to understand cryptocurrencies. A cryptocurrency is a digital currency created and regulated by a dispersed community of programmers using encryption techniques. Bitcoin and Ethereum are the most popular. All the currency transactions are stored on a blockchain, an encrypted public ledger. Cryptocurrency can easily be exchanged for real money with parties that accept them.
What are ICOs?
ICOs are like IPOs, but instead of selling shares to the public for money, a company gives the investors its own cryptocurrency called “tokens” in exchange for existing cryptocurrencies (like Bitcoin) it receives from investors. The tokens are usually liquid right away and can be resold immediately.
Unlike IPOs, the founders’ stake in their own company does not get diluted by selling the tokens. The tokens are not shares of the company – although these tokens could be understood as a new form of stock.
The big difference between the traditional companyy share and a token is that a share usually comes with voting and dividend rights whereas a token merely reserves a right to the startup’s products once it’s available. Your only power as a token holder is to buy or sell the token. Like stock, the token price should increase as the company becomes more valuable.
To illustrate, Brave traded a cryptocurrency it created, called BAT tokens, and sold 1 billion of them to investors in under 30 seconds. Investors paid for them with 156,250 Ethereum, which is worth $35 million. Brave gets cryptocurrency it can exchange for real money while their founders preserve their respective equities.
Launching an ICO
Typically, startups use an online service such as CoinList or Waves to develop their own cryptocurrency, publish a white paper, market the ICO on social media and then launch it on their websites. People go to the site to exchange their Bitcoins or Ethereum for the startup’s tokens.
The white paper must include details such as what and how you intend to create your product or service, how much money you need and a set of comprehensive legal terms and disclaimers. If the white paper is unclear, misleading or incomplete, your startup may be sued by disgruntled investors and the SEC.
ICO fraud and theft by hackers is a serious concern. There have been many cases of hackers stealing money and private information from investors or developing fraudulent ICOs.
Hackers, for example, hijacked CoinDesk’s, a fintech startup, website in the middle of their ICO. The hijackers took control of the site and siphoned $7 million worth of Ethereum to its bank account.
Additionally, as was expected, the SEC’s recently ruled in July that ICO may be subject to federal securities laws. The SEC declared that all ICO issuers must determine if their tokens are securities before they are offered to the public. It’s best to seek guidance from an experienced startup attorney to draft the ICO white paper to protect you from future liabilities.
If the tokens are determined to be securities, they must be registered with the SEC before they are offered to the public. Failing to properly register and to abide by the applicable securities law could result in a hefty fine, criminal prosecution and lawsuits from investors, making these avoidable mistakes costly. It’s best to seek legal counsel to determine what securities law apply to you and your company well before the ICO launch date.
Use Tokens to Finance Your Vision
ICOs have emerged as a disruptive alternative to IPOs and VC financing. They offer you an immense opportunity to raise money within minutes and preserve majority ownership of your company. You won’t have to sacrifice your ownership, profits and vision to investors. It’s no wonder more startups are launching them.
Having said that, ICO is uncharted territory. There is much legal uncertainty surrounding initial coin offerings.
If you mistakenly determine your ICO tokens are securities, you’d waste time and money filing them with the SEC. If you mistakenly determine they are not or register incorrectly, you open yourself to immense liabilities. Either way, a mistake will be very expensive and irreversible.
We here at Buchwald & Associates can help you develop clear white papers, determine if your ICO is a security and help you register your ICO with the SEC. We have the experience and detail oriented mindset to help you safely launch an ICO that will help you legally raise capital within minutes and realize your vision. Call us to get the insight you need.