Start-up technology companies have managed to raise close to $1.3billion in 2017 so far trough “initial coin offerings” as a form of crowd funding.
17 Jul 2017 – Financial Times
What is unclear from the report is whether this is a bubble linked to hype around cryptocurrencies such as bitcoin, or if it represents deep change in the way start-ups raise money, equivalent in disruptive power to the launch of the internet
An ICO involves a company focused on blockchain technology selling digital tokens or coins, such as ether or bitcoin, that often enable investors who buy the tokens to use the software or service that the start-up plans to produce. The money is usually raised in about 30 minutes and investors are not given any stake in the company or voting rights.
The report said some specialists were now calling ICOs “token launches” to avoid attracting scrutiny from securities regulators. Autonomous said: “Imagine there are plans to open a new casino, and for funding, the casino sells its own plastic chips before opening, in anticipation of customers using these chips and creating economic value.
“Further, the buyers start trading these chips based on the expected value of the casino, how well attended it will be, and whether other chip holders are trading.”
While early ICOs mostly raised money for cryptocurrencies, cloud computing systems or core technology platforms, more recent ones have also been focused on social media, gaming and financial services applications of blockchain technology.
The report compared the tokens issued in ICOs to the virtual currencies used in video games such as Second Life and World of Warcraft, which can be spent inside a game or traded for real-world money outside of it. But it warned that some investors were pouring millions of dollars into companies that had at best partially formed business plans.
“Unfortunately, many ICOs are fraudulent and intended to take advantage of excitement in the ecosystem by leveraging social media for promotion and a lack of enforceable consumer protection, raising legitimate regulatory concerns and attempts by select market participants to self-regulate,” it said. Autonomous calculated that $26m was raised from ICOs in 2014, $14m in 2015 and $222m last year.