The Initial Coin Offering, the Bitcoin-y Stock That’s Not Stock—But Definitely a Big Deal

Next month, a venture capital firm called Blockchain Capital plans to do something that could change the way companies get funded—and perhaps even the way they operate. Instead of an Initial Public Offering, in which a company sells stock via a regulated exchange like Nasdaq, the San Francisco-based VC firm is making an Initial Coin Offering, selling its own digital token as a way of raising money for its latest venture fund. Anyone who buys a token will be buying into the fund.

Yes, they call it an ICO, and over the last 14 months, more than 60 startups, open source projects, and ragtag online communities used this method to raise over $250 million for their own business efforts. “The data shows a ton of momentum at the end of the year,” says Matt Chwierut, of Smith and Crown, a new research outfit that tracks this new phenomenon, “and that momentum has only continued.”

This isn’t just more blather about bitcoin as the future of currency. Yes, many of these online operations are merely trying to create digital currencies that serve as an alternative to bitcoin. The Zcash Electric Coin Company, for instance, recently offered up a currency designed to ensure that financial transactions remain private. But many others are using new internet tokens not as digital currencies per se, but as a way of building an entirely new kind of business.

Take The Golem Project, which bills itself as “AirBnb for computers.” This rather elaborate effort aims to create a system that allows anyone to buy computing power from anyone else. But the added trick is that this system will operate outside the control of any one central authority, as a kind of online co-op. Golem recently offered up a digital token that provides a share of the fees generated when services are bought and sold on its network. This token is not quite a currency. And it’s not quite a stock. It’s a third thing when you thought there were only two.

For now, this strange new breed of business operates outside of government oversight, and nobody is really sure how governments will regulate these kinds of sales. That’s where Blockchain Capital comes in. Today, the firm announced that in the US, it will only offer its tokens to accredited investors, as the firm seeks to comply with US regulations. Overseas, any investor can buy the token, which will be called BCAP. The firm plans to release a detailed memorandum describing the offering on April 3, and the offering itself will likely follow after a few more weeks, through an organization based in Singapore. In Singapore, regulators do not consider this kind of digital token to be a security.

“Our view is: let’s just face regulation head on, and see if this can be done compliantly,” says Blockchain Capital managing partner Brock Pierce. “Once we’ve done this, everyone is going to copy the roadmap we’ve created.”

This method is new to the ICO world, but probably warranted. The structures to help ICOs succeed and thrive in the mainstream are still evolving—like the Argon Group, which longtime Wall Streeter Stan Miroshnik founded to help oversee ICOs. Argon will bookrun the token offering on behalf of Blockchain Capital, meaning, in this case, that it will actually issue the token. “Our mission is to help this new capital market evolve,” Miroshnik says.

Certainly, Blockchain Capital’s coin offering is far less extravagant than an ICO from a distributed operation like The Golem Project. And it lacks the potential to truly change the nature of business in the way such a project can. But it could at least call greater attention to the complex dynamics that an ICO can bring.

ICOs are a very different animal from IPOs. Operating atop a blockchain—a vast ledger for recording digital transactions, like the one that underpins bitcoin—these coins have value in and of themselves. When you buy a coin, you’re not just buying something that represents a piece of an operation. You’re buying an actual piece. “It has some resemblance to how equity works,” says Peter Van Valkenburgh, a lawyer and the director of research at the Coin Center, a crypto-finance think tank. “But it works in a purer way.” Plus, these coins can help drive a truly decentralized operation like the Golem Project. Like many other ICO tokens, the Golem coin sits atop the Ethereum blockchain, which can run automated agreements called smart contracts. That allows the project to operate without a central authority.

The Blockchain Capital token will be somewhat similar, in that it will let individuals buy straight into an operation. The firm invests solely in, yes, companies exploring technologies related to bitcoin and the blockchain. Previously, it raised money for two traditional funds. Now, its ICO will provide part—but not all—of a third.

This ICO also means investors can readily sell their investments on a secondary market. In the US, only accredited investors can buy the coin at the beginning, but after a waiting period, they can offload their investments online, and others can buy in. “We call this liquidity-enhanced venture capital,” Pierce says, meaning that people can invest without locking their money up for years on end. In the long run, this kind of setup could attract more investors, and more money. Of course, as Van Valkenburgh points out, the secondary market for these coins may be subject to regulation.

Because only accredited investors can buy the coin in the US—with Blockchain Capital adhering, it says, to regulations that exempt it from registering the coins as securities with the SEC—the initial ICO won’t reach as many investors. And the fund certainly isn’t decentralized. Pierce and his partners will decide how to invest the money. Across the community that drives bitcoin and various other blockchain projects, the real hope is that ICOs can feed far more ambitious creations. Already ideas like Arcade City, a decentralized version of Uber, and Augur, a decentralized service for prediction markets, have raised money through ICOs. Ethereum itself was originally funded with an ICO, and similar blockchains continue to offer their own coins. The knock-on effect is enormous. A new San Francisco hedge fund called Polychain is investing solely in ICO coins.

That said, there’s reason for caution. Blockchain watchers will remember the Decentralized Autonomous Organization, a blockchained venture capital fund that got hacked to the tune of $50 million. Today’s ICOs have even more potential than the DAO, as long as the people using them take the time to ensure they’re on solid ground.

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