2017 will be remembered as the year when crowdfunding through token sales or initial coin offerings (ICOs) became an epidemic; funding around 288 companies and more than $3.6B in YTD and eclipsing the amount of money invested by VC on early-stage startups.
Over the last couple of years, hundreds of companies have thrived from ICOs, but 2017 became the year when this spiraled out of control and resulted in an unstable ecosystem plagued by disruptive companies, scams, and ill-established business structures.
Last November, the unregulated ICO bubble came to a halt, opening doors for a new structured ecosystem with clearer regulations and defined roles. This ICO euphoria has called the attention and a rapid response led by regulatory bodies, investors, and entrepreneurs; paving the way for a responsible, ethical, and legal utilization of one of the disrupting forms of startup funding.
Let’s go back to May 2017. This was the tipping point when we started to see high profile ICOs continue to thrive. Storj raised $30 million, Brave $34 million in a matter of 30 seconds, Aragon 25 million in 20 minutes, and Bancor 140 million in a few hours. However, most of these present a number that is far from what is rationally needed to launch and grow.
Investor meetups were all about ICOs, LPs started to ask what the hell was going on and why they were not investing in them. As a consequence, the market started to see VCs, sometimes anonymously and sometimes openly, investing in ICOs. ICOs had become the “fidget spinner” of venture investment.
However, ICOs were still the “wild west”, with more scams and celebrity endorsed whitepapers than serious ICOs. The consolidation of the market came when people started to address the question of whether a token was a security. By that time, most tokens didn’t deliver any rights or ownership and the level of accountability was 0. Around May we started to see the first attempts of thorough technical due diligence for tokens. The sharks were here and they were the first who raised the bar.
The market finally faced reality. Noone couldn’t avoid the disruptive capacity of blockchain as a funding mechanism. This train was coming faster than any other. As a comparison, it took almost five years for the SEC to implement title 4 of the JOBS act and allow non-accredited investors to buy securities in private companies. Since May 2016, when Title 4 came to play, around 53 million had allocated 176 companies. On the other side, ICOs started in 2014 and so far have funded more than 250 companies for an astonishing 2 billion dollars.
The next group that took ICOs to another level, were token traders and cryptocurrencies speculators. Currently, there are entire communities sharing frameworks to bet investments. Thought leaders have taken a collaborative approach to creating due diligence tools (Securities framework, Investment template).
As a result, regulatory bodies shifted their attention. Many countries have already issued a compelling regulation to generate trust and compliance in the process. While China completely banned ICOs, market leaders like Russia, USA, and Singapore have instructed their regulatory bodies to come up with frameworks that generate trust and stability in the market.
Singapore continues to remain a hub for corporate investment, building on its 200 banks and assessments of 2 Trillion, and emerging as a top crypto-token market. Singapore has seen several extremely successful ICOs, including TenX’s achieving $80 million (How Singapore Became a Hot ICO Destination). The MAS (SEC of Singapore) has declared that tokens that are securities that need to comply with Singaporean laws and regulation. (Singapore MAS on ICO).
In the United States, the SEC has also shown an impressive level of adaptability in having an open conversation with key players in the ecosystem and with understanding the benefits of a regulated crypto market (Coinbase Securities Framework, SEC Investor Bulletin).
As a solution, The Jobs Act exemptions have also become a tool to regulate tokens that are considered securities through Reg D and Reg A+ compliance. (Manhattan Street Capital Approach). While selling securities outside the US, SEC’s Regulation S can be utilized which imposes certain restrictions such as 40 days and 1-year holding periods for investors. (Reg S).
The never-ending wave has brought many new players that automate and make the ICO process more efficient and legally compliant such as Coinlist or Start Engine, which has extensive experience and market share in the JOBS act equity crowdfunding market. Curiously, many of these new players have used ICOs to seed fund their projects. This is how wallets, exchanges, escrow, PR, KYC and ALM services that generate trust came to the landscape.
With all those changes it is uncertain if the ICO party is over. The exponential growth of token market lost the pace in November with around 100 million invested. Still, a big number but nothing compared to the 600 million we saw in September. For sure, the higher entry and regulation barriers will bring a more consolidated, better-informed market, and fewer scams.
While traders are waiting for compliant secondary markets for tokens to be open in the next months, 2018 will be the year when many successfully funded ICO will have to release their products and we will be able to really evaluate if it was a wave of disruptive innovators or just another tech bubble.