If you were around for the 2017 initial coin offering (ICO) boom, you’ll remember an era of “lambos”, “moonshots”, and “100X returns”. If this jargon makes little sense to you, the ICO was a wildly popular fundraising tool used by blockchain companies, though that popularity has waned significantly in 2019.
The height of this trend was in mid-to-late 2017. Billions of dollars were raised by hundreds of blockchain startups. Unlike the “initial public offering” (the fundraising model used by conventional corporations first offering their stock to the marketplace), ICOs are typically organized without any regulatory oversight.
This allowed new (and often unprepared) companies to raise enormous sums while circumventing regulated fundraising best practices. The coins and tokens that investors received often gained value quickly when traded in cryptocurrency exchanges. Returns of 10X an initial investment (or more) were not uncommon.
Everyone, it seemed, was making money. This motivated thousands of investors/speculators to buy up unproven ICO coins. Hundreds of poorly conceived blockchain projects conducted ICOs during this time. Many of these were cynical cash grabs and frauds, with the companies behind the ICO never intending to bring a useful product the market. An estimated 80% of ICOs in 2017 were scams.
The United States Securities and Exchange Commission began prosecuting ICOs in 2017. Among completed ICOs that were not charged, there arose anxiety that charges could be forthcoming. ICO scammers had much to fear, but so did legitimate ICO companies. These companies worried that their coins/tokens would be deemed “securities” by the SEC. This would mean that these past ICOs had been unauthorized security sales (basically, selling stocks illegally) – a crime that would put these companies on the wrong side of federal tax and securities law.
Despite an unclear vision for the future of the industry, ICOs like EOS and Telegram ensured that many billions of dollars were raised through the initial coin offering in 2018. However, momentum has largely sloughed away by 2019. In January 2019, only $291 million was raised through ICOs, a 95% decline from the market height of $5.8 billion in March 2018.
There’s no shortage of active ICOs today, but few have the credibility of past record-holders. Much of this is due to the industry’s reputation suffering from scams, as well as deterioration of investor participation. The change in regulatory scrutiny, however, may be the biggest factor in the move away from the ICO, especially in the United States. But this may also hint at the next incarnation of the ICO industry.
Are STOs the New ICO?
From another perspective, ICOs aren’t going away at all; they’re simply taking another form. The security token offering, or STO, has many of the earmarks of the ICO. Just like an ICO, the STO introduces the crypto markets to a new cryptographic token, and the company throwing the STO uses blockchain to accomplish their goals.
However, unlike an ICO, an STO can only be initiated with the permission of regulators. STOs also expressly sell equity ownership of a blockchain company to investors (i.e., the investors buy a small portion of the company, just like with a stock). STOs can only accept investments from registered, government-identified investors.
As you might imagine, fraud is much less likely with an STO than with an ICO. There is much more regulatory oversight at all levels, and the blockchain company behind the STO has a higher degree of responsibility to provide value to the investor (in the form of equity) than companies behind an ICO (which offer no equity). Furthermore, an STO has to individually comply with federal regulators in any nation from which investors are accepted. No more international cash-grab free-for-alls with STOs in 2019.
STOs are, therefore, much more like conventional corporate fundraising tools, such as the issuance of stock through an initial public offering (IPO). STOs, however, still pertain specifically to the blockchain space.
ICOs Still Exist, and STOs Have a Long Way to Go
Despite the changes in this industry, there are still dozens of ICOs in operation and hundreds more waiting to join the party in the next year. The list of upcoming STOs is growing and includes some high-profile offerings like KodakOne and PaxCoin.
From our perspective, it looks like the ICO wave is far from over. ICOs conducted by non-American companies have little to fear from US regulators (apart from China, among the most aggressive in the world). With so much money still to be made from global investors, ICOs still attract scammers and the occasional well-meaning company.
STOs are harder to get off the ground, but they likely have a clearer path forward. Furthermore, if any company wishes to earn significant capital through blockchain fundraising, submitting to STO oversight will prevent them from having to deal with legal challenges years down the road, as many from the 2017 ICO wave are currently enduring.
For our part, we recommend that our readers be very skeptical of any ICO that seems to skirt national regulation. These fundraising efforts will present little in the way of investor protections. In any case, the days of 10X overnight ICO investment returns are mostly behind us, so there’s little to be gained from giving money to noncompliant ICOs.
STOs, meanwhile, have some growing to do if they’re to replace the ICO within the blockchain space and take up permanent residence in the world’s corporate fundraising system. As we believe blockchain and cryptocurrency are here to stay, we think that STOs will become the new status quo for the industry, but in the meantime, ICOs and STOs will co-exist for at least the rest of 2019.
Featured image: Vectopicta/Shutterstock.com
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