Initial Coin Offering

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see also our entry on: Tokenization as Business Model


Thomas Rippel:

"According to the Swiss Financial Market Supervisory Authority (FINMA) Guidelines for Initial Coin Offerings (ICO)18, published on 16 February 2018, “in an ICO, investors transfer funds, usually in the form of cryptocurrencies, to the ICO organiser. In return, they receive a quantity of blockchain-based coins or tokens which are created and stored in a decentralized form either on a blockchain specifically created for the ICO or through a smart contract on a pre-existing blockchain.” (


1. Nathaniel Popper

"Coin offerings are a way for start-ups or online projects to raise money without selling stock or going to venture capitalists — essentially a new form of crowdfunding.

The programmers raise money by creating and selling their own virtual currency, generally with rules similar to well-known virtual currencies like Bitcoin. The new tokens are usually designed so that they can be used only on a computing service the programmers are building.

Filecoin, which raised $257 million in the largest coin offering to date, is being designed to pay for storage on a global cloud storage network that the creators of Filecoin are promising to build. BET, another coin, is being designed to serve as the chips in an online casino its programmers are promising to build.

“Promising to build” is the operative phrase here, because in almost every case the services that will supposedly make these coins valuable have not yet been finished.


The name for coin offerings was clearly inspired by the initial public offerings that companies do to sell stock to investors. But unlike stock offerings, coin offerings are generally designed so that investors don’t get an ownership stake in the start-ups. If the coin does provide an ownership stake, the Securities and Exchange Commission has said, the companies must comply with all securities law. A few coins have done this, but most have tried to avoid it.

Investors can contribute as much or as little money as they want in these offerings, which are generally more like crowdfunding campaigns that new projects do on Kickstarter or Indiegogo.

Why would anyone pay for these coins?

In principle, people buy these coins because they want to use the services on which the coin will be used. So far, though, almost none of the services have been completed.

In the meantime, people are buying coins because they are hoping the value will go up. When the Stratis token was released in July 2016, it was worth seven-tenths of a penny. In the fall of 2017, each of those tokens was trading for around $2.95, a 42,000 percent increase.

After the initial coin offering, when the programmers sell their tokens for a set price, coins are traded on third-party exchanges through open-market bidding — similar to the way stocks are traded and priced after an I.P.O. The programmers who created the coins generally keep a large stash of coins so that they also benefit if the price goes up.

The people betting on the price of these tokens are generally betting that the services promised by the programmers will be completed, creating demand for the coins in the future." (

2. Ian Bogost:

"Why tout a private, distributed-ledger currency as an agent of liberation when it amounts to a complicated, software-backed, company-town store? One answer: It could give the workers a stake in the company store. In the world of cryptocurrency, this is known as an ICO or Initial Coin Offering. ICOs incentivize the use of an unproven platform, like Kik’s, by distributing an initial batch of cryptocurrency to early adopters. In theory, that value will increase if the platform becomes popular, creating a valuable base investment for its initial users.

In the extremist libertarian aspiration, smart contracts would allow anonymous actors to trade anything whatsoever in an untraceable way, via unregulatable markets. Instead, actual smart contracts, ICOs, and distributed ledger-backed devices mostly offer new ways to interface with the private technology industry. For example, in Brooklyn, a solar microgrid startup called Transactive sells clean energy to a community via Ethereum. And Toyota just announced a partnership with MIT to develop distributed ledger-based infrastructure for future autonomous vehicle services." (

3. By Alex Shelkovnikov and Ramon Recuero:

"For the first time in history, we’ve witnessed a cryptographically secure way to prove ownership of an asset available to pretty much anyone in the world. This decentralized ledger opened up an opportunity for companies to store shareholder registries on the blockchain. Initially, companies and projects like Mastercoin were performing crowdsales and storing information about contributions and ownership on the Bitcoin blockchain. Then came Ethereum which further expanded capabilities by enabling token issuance and allowing you to collect funds via a smart contract.

Ethereum has opened up the floodgates and popularised this new fundraising mechanism, the initial coin offering (ICO). Ethereum itself ran a successful fundraise in July 2014 through an ICO and obtained 31,591 BTC which at the time was worth $18.4m. Since then, over the past four years, we’ve seen incredible growth in the total amount of money raised by projects (decentralised and not really decentralised) via an ICO8.

Furthermore, it enabled projects to raise a small amount of money from a big number of highly engaged individuals. Individuals with ‘skin in the game’ that would help kickstart and evangelize the project. Unlike traditional investment opportunities available to retail investors, here you could invest in a project at the initial stage. You didn’t need to know the founders, or angels or have any particular connection to invest in it. Investments were democratized. However, there was a tradeoff. Everyone could invest in high return investments early in the project. On the other hand, shady projects could take advantage of and scam unwary believers." (


Utility Tokens

1. Chance Barnett:

"Most ICOs being done today aren't intended to be securities offerings, as they don't offer equity or ownership in the underlying company the way traditional angel or venture investments do. Rather, a large majority of ICOs are intended as “utility tokens" which allow buyers of the token to access and pay for usage of a blockchain-based software service.

One example of a utility token in use today is the Ether token, as it relates to the Ethereum computing platform. Ethereum is the blockchain-based platform where the large majority of the current ICO’s have been developed. When using the Ethereum network, there are costs associated with the processing of blockchain-based transactions. These costs are paid in the form of the tokens used on Ethereum, called Ether. These transaction fees paid in Ether are called "gas" in the Ethereum network.

In this way, the Ether token provides access to, and payment for, the computing and transactional functions of Ethereum. But beyond its transactional usage, Ether is also a cryptocurrency that is bought, sold, and traded on the open markets.

And while some tokens may not be considered a securities offering (utility tokens), the recent SEC release put out in July warned investors about the potential for fraud with ICOs as unregulated sales. Specifically, the release outlined details of the SEC investigation into the DAO which raised over $150M in its own ICO, and reiterated its ongoing concerns that some ICOs may constitute securities offerings, like the DAO, while not being treated as such." (

2. Cathy Barrera:

"An ICO, unlike an equity sale, can help a startup identify and demonstrate demand for its product. Because tokens are the means by which future customers can gain access to the product, the purchase of tokens by interested consumers is directly indicative of future demand. For equity, which entitles holders to future profit flows but not to the product itself, this link is clearly weaker.

Catalini and Gans draw an important conclusion based on this feature of tokens. They demonstrate that when network effects are present and there is uncertainty over demand, a token sale can publicly demonstrate high demand and allow projects to proceed that would not be able to launch in the absence of that public information. In other words, for those consumers who would only adopt if the user base was sufficiently high, observing a token sale can convince them that adoption would be worthwhile." (


Regulation of ICO's and Tokens

Joi Ito:

"THINK OF AN ICO as a means of creating digital certificates that have signatures, rules, programs, and other attributes controlled cryptographically. You could create a digital version of a check, a stock certificate, an IOU, or a gift card for a hamburger or a barrel of oil. That makes these certificates equivalent to a security, a commodity, or even just a simple financial transaction.

In their traditional forms, each of these elements have different risks and different regulatory bodies governing them. The Securities and Exchange Commission, the Treasury Department, and so on play a role in reducing financial risks and preventing financial crimes. In other words, some of the rules and regulations—the friction—in the existing system is there to protect investors, customers, and society.

But those regulators haven’t caught up with ICOs quite yet. Issuers are getting rich and unwitting investors are buying tokens of questionable value.

On July 25, 2017, the SEC announced that if a token looks like a security, it will regulate and treat the token as a security. It subsequently set up a task force to go after ICOs that are scamming investors and exploiting gray areas in securities laws. But many of the tokens issued through ICOs today are not shares in a company. Rather, they are “tokenized” versions of some sort of product, service, or asset, or a promise to invest funds in research or infrastructure. Issuers are calling the sale of such tokens a “crowd sale” instead of a “funding” to make it clear that people are buying a product rather than a security—and, intentionally or not, avoiding regulatory scrutiny." (

In the U.S.

By Alex Shelkovnikov and Ramon Recuero:

"There has been a lot of uncertainty about legislation around ICOs since the beginning. Mastercoin’s board stated at the time of the ICO: “There’s no promise of dividend or equity. You’re just buying a password to access this software, and you should do that if you think that software is valuable”9. Mastercoin was claiming that their tokens were not securities. This point is critical because if you are selling a security to US investors, or if you are a US-based organization or person selling a security to even non-US investors, you need to comply with SEC requirements and regulations.

Mastercoin was careful with the language, and they may have had a point about not being a security. Many other projects have raised funds through ICO by selling what they claim to be a utility token. However, not all of them are.

ICOs raised $6.5 billion last year. This gold rush has attracted many dubious projects. Bitconnect being the most infamous example. It’s good that the SEC is trying to protect retail investors from scams and Ponzi schemes. They’ve issued subpoenas and challenged the utility status (non-security) of several token sales. Exuberance swung the pendulum way too far in one direction.

Navigating the US law in this context has been difficult. Last fall a Simple Agreement for Future Tokens was released. This SAFT, developed by Coinlist, AngelList, Protocol Labs and Cooley, was an extensive effort to formalize a framework for compliant token sales in the US. This initial SAFT even went against the open ethos of cryptocurrencies and limited the sale to accredited investors only. Some examples of crowd sales performed through the SAFT are Blockstack (partially) or Filecoin. However, recently, Chairman Clayton of the SEC has raised doubts about the validity of the SAFT and claimed: “I believe every ICO I’ve seen is a security”10. One thing is certain, many of the tokens that were issued potentially fall under securities rules. The pendulum is now swinging back.

Where does that leave us? An ICO issuer could still operate under the assumption that their token is a security, and conduct a token sale under the existing framework of securities regulations." (

More at [1]


  • "In 2013, the first initial coin offering or ICO appeared. Mastercoin raised 4,700 BTC ($5 million at the time) in bitcoins in exchange for their tokens" [2]

Roy Walker:

"how did they come into existence? Many people believe that the first ICO was Mastercoin. In 2013, J.R. Willet published the Mastercoin white paper, which stated that Mastercoin was intended to sit between the bitcoin network and the application layer. In the paper, he posited that it did not make economic sense to create a completely new blockchain. He believed that it made more sense to simply build applications on top of the existing networks (aka bitcoin) and wanted Mastercoin to be the link between the two. In the paper, he also outlined a way of crowdfunding on the blockchain, which would later be known as an ICO. Mastercoin went on to successfully raise $500,000 worth of Bitcoin in August 2013.

While Mastercoin proved that it was possible to complete an ICO using Bitcoin, there were clear technical limitations; most notably, it’s scripting language was not Turing-complete (can you see where this is going?). Ethereum was created to solve those issues. Ethereum’s full scripting language allowed users to create smart contracts and fully decentralized applications where they could “create their own arbitrary rules for ownership, transactions and state transitions”. In addition to the scripting language, Ethereum provided several other features that improved the ICO process; notably, it allowed users to lock coins until the result of the transaction. This allowed users to put coins in an escrow of sorts until the full amount of the ICO is crowdfunded. These differences made Ethereum an ideal platform for ICOs.

The release of Ethereum Frontier in June 2015 facilitated early growth of the ICO market. The first successful ICO was held when Augur raised over $5 million on August 17, 2015 (only eighteen days after Ethereum Frontier was released!). While there was a substantial increase in ICOs in late 2015 and early 2016, the true growth of the fundraising method did not occur until Ethereum upgraded the network through the release of Ethereum Homestead in March 2016. Homestead increased transaction speeds, allowed for protocol revisions and simplified the development process. This lowered the technical barrier to entry, enabling developers without a highly technical background to use the network.

The growth of ICOs was stunted in mid-2016 when the DAO was hacked (which we’ll discuss in detail below). However, ICO volume bounced back quickly and 2017 became known as the “year of the ICO”. Statistica reported that ICOs raised a total of over $4 billion in 2017, which is an unprecedented amount of capital. To put that in perspective, they also reported that VCs deployed a total of $709 million in the blockchain space, indicating that ICOs raised 5.7x as much capital (to be clear, this is just referencing VC investment in blockchain: total VC investment was over $70 billion). This trend has continued in 2018 and some people have begun to claim that ICOs have the potential to disrupt traditional IPO processes."




"Only a few years ago, digital currency entrepreneurs, like other Silicon Valley peers, had to line up to pitch their ideas to venture capitalists, who controlled their destiny as virtually the only source of funding.

So-called initial coin offerings (ICOs), where new tech companies using blockchain technology can raise millions quickly by creating and selling digital "tokens," with no regulatory oversight, have turned traditional relationships upside down.

"The day when VCs were the elusive elite and primary source of capital for startups has ended," said Jamie Burke, founder and chief executive officer of VC firm Outlier Ventures, which specializes in blockchain and other technology investments.

"When a startup can raise $35 million in 30 seconds without any dilution, the genie is out of the bottle and it isn't going back in," he said, referring to Brave, an open source web browser that blocks ads and trackers, which sold its Basic Attention Token in June.


"Tokens can galvanize a community: lots of individuals and corporations are able to work together and improve a decentralized network," said Ryan Shea, co-founder of tech start-up Blockstack in New York." (

2. Marc Strauch:

"The second significant disrupter is the transformative value of initial coin offerings as a tool for capital formation outside of (at least for the moment) the traditional hierarchical socio-economic framework of Wall Street, investment banking, governmental regulatory systems, institutional and accredited investors and the “old-boy” network.

Partially as an evolution of crowdfunding based on social community sourcing, ICOs have democratized the process of capital formation for many startup and emerging companies. ICOs empower individuals and businesses to deal directly and independently with each other without the need for a middle-man and associated fees. ICOs minimize transaction delays, lower costs, and for the moment until new SEC regulatory controls are enacted, circumvent traditional regulatory controls that have long been the provenance of traditional banking and financial systems.

Some people believe that the very nature of how each of us as individuals and the work and/or services we provide in the economy, especially as independent contractors could eventually be defined by individual coin offerings based on the intrinsic value that each of us as individuals provide in the global economic ecosystem.

This vision is potentially more true for the knowledge workers and services professionals and post-information workforce than typical office workers and those working in retail or manufacturing.

Yet, in a world that has become increasingly smaller and more intimate due to geographically independent workers based on digital skillsets, it is only a matter of time and demography when this experience will become more dominant throughout the world.

This transition has already significantly influenced the old economic status designations of nation states based on geography such as ‘west’ and ‘east’ and ‘north’ and south’ as well as economic maturity distinctions such as ‘developed’ and ‘developing’ or ‘under-developed’." (

Why aren’t these start-ups raising money through venture capitalists?

Nathaniel Popper:

"The most obvious reason to do a coin offering is that you can raise more money than you ever could from venture capitalists. The most valuable virtual-currency company that was funded with venture capital, Coinbase, raised $100 million this year, five years after it was founded. The same day that was announced, Filecoin, which doesn’t even have a working product, announced that it had raised over $200 million.

Some programmers look to coin offerings because they can raise money for projects that venture capital won’t fund. Specifically, coin offerings can provide funding to build open-source projects that in the end no one will own, the way that no one owns Bitcoin or Ethereum. Filecoin’s cloud storage network, for instance, would be operated by its users rather than any central company." (

What’s Driving the Growth of ICOs

Chance Barnett:

"Here are several of the likely contributors to the growth of this market, along with thoughts on each from leaders in the cryptocurrency and venture investing space...

1. The Massive increase in the Value of Cryptocurrencies

The market capitalization of all Cryptocurrency has risen from $7 billion in January of 2016 to over $130 billion as of now in September 2017.

Bitcoin has appreciated nearly 30X since September of 2013 ($135 USD per Bitcoin), reaching over $4,000 per Bitcoin in September of 2017. In part, this is due to Bitcoin’s role as the most widely known, used, and accepted cryptocurrency for payments.

Ether has appreciated more than 100X since August of 2015 ($2.83 USD), reaching over $300 in September of 2017. In part, this has been due to Ether’s role as the core utility token of Ethereum - the most widely used blockchain-based computing platform for ICO’s / token sales.

The early cryptocurrency buyers and holders have experienced massive gains and are now sitting on hundreds of millions, or even billions, in cryptocurrency value.

ICOs are a way for some of these early cryptocurrency holders to diversify their holdings using the cryptocurrency itself, without taking their money out into fiat currency (offline bank-based dollars).

Sam Englebardt, Managing Director of Private Investments at Galaxy Investment Partners, the family office of billionaire and large cryptocurrency investor Mike Novogratz, said...

“It would be naive not to acknowledge that there’s something very bubbly about what’s going on here with ICOs, but it’s also the easy answer. While bubbles are sometimes fueled by nothing more than pure speculative mania and greed, most are actually rooted in something very real. Railroads were that way. The internet was obviously like that; the excitement was built on a legitimately transformative innovation and, when the dust settled, that innovation ultimately met and exceeded the initial speculators’ wildest expectations.

I think the same is true with the blockchain — the underlying potential of the blockchain to touch and disrupt so many different aspects of our lives, on a global scale, is becoming apparent. Ideas spread fast these days and crowdfunding did a lot of the groundwork to make those ideas actionable. It can’t go up like this forever, but I’d say we have a long way to go before we hit the top."

2. The Power of Blockchain, Tokenization, and Decentralization

In the last year we’ve seen an incredible move by startups and founders towards use of blockchain technology and tokenized models. Rather than building new products on centralized architectures and database structures, an incredible wave of new development and innovation is happening on blockchain technology to kick off new decentralized services and models.

There’s a deep technical community running full speed towards a blockchain-based future, with experienced technology company founders jumping in to the fray with blockchain. A majority of the ICOs you’re seeing today are for new companies, who are yet to launch their products to the market.

That said, with the tremendous interest and adoption from leading technologists and founders, it’s no surprise that we’re also starting to see a growing list of more traditional VC investors putting money into decentralized applications and blockchain-based approaches to traditional and existing businesses.

We’re also starting to see the ICO and tokenization model start to catch up with more mature and established companies. Erick Miller, CEO of CoinCircle and investor at his venture capital firm Hyperspeed Ventures, said...

“The invention of true peer-to-peer digital money was first just an experiment that has grown into a revolution. This digital money, which pairs blockchain technology with cryptocurrency, enables an unprecedented transformation in how we store and transmit value. We are now in the next phase of the experiment and it is one of the most simple but incredibly fundamental paradigm shifts in the history of currency. Today, we have peer-to-peer programmable money, decentralized protocols utilizing their own coins, and coins that execute unstoppable decentralized logic all creating an entirely new economic system. I believe what is happening in the space today will bring about an era of new technological connectivity.”

3. Token Sale ROI

Another reason for the rise in ICOs are the incredible returns that some tokens have provided to early buyers. For example, here are some top ICO performers according to (as of September 22nd, 2017):

Ethereum: 84,720% ROI since ICO

Stratis: 54,038% ROI since ICO

Augur: 2,720% ROI since ICO

ROI values since ICO :

With this, it’s incredibly important to understand that price appreciation of a token in the short term might have little, if any, bearing on the medium and long-term sustainability of the token and the underlying company or project for which the token was created.

4. Token Sales As Community Acquisition

Great ICOs aren't just for the money. New services that leverage blockchain technology and incorporate token-based models do so to use tokens as a mechanism for the exchange of information and value within their product. Which is why, the more buyers and holders of a token, the greater the potential for the usage of the token, and thus demand.

In this way, a token sale represents a new model of crowdsourcing or crowdfunding, where the line between buyers and customers are blurred.

As an example, imagine if 1,000 new participants sign up and buy tokens in an ICO. This not only provides funding for futher development and expansion, it also jumpstarts the underlying service with a community of users as token holders. One example of this was the Bancor ICO, which took in over $153M at the time, while the sale also resulted in thousands of token-buyers. These early and first buyers of the Bancor token are the most likely future users and adopters of the core protocol and services that Bancor provides.

"We had one of the largest bounty programs in history with thousands of active participants working towards the success of the token launch, directly through our software's alpha demo," Galia Benartzi, CoFounder and VP of Business Development at Bancor explained.

"While we ourselves were a small team, we had ambassadors all over the world translating, explaining and creating great content about the Bancor protocol. These contributors remain more motivated than ever to see the project succeed, as they own a piece of the open source network via their tokens. Rather than paying marketing or PR firms, we can share these resources directly with end-users in a distributed and still orchestrated way. The reach is a step function larger and also feels much more authentically aligned. This is inline with blockchain's promise to decentralize every aspect of business, including growth itself." (

Very High Failure Rate of ICO's

Simon Black:

"A lot of people view ICOs as an asset class like stocks, bonds or real estate. But that couldn’t be further from the truth.

Initial coin offerings are simply a funding scheme. Companies looking to raise money will post a white paper on a website, post some pictures of their “C-suite executives,” and set up a Twitter account… that’s basically it.

The goal is to raise funds by issuing “tokens.” These tokens typically serve as pre-paid credits that can be used within the ecosystem of the company raising the funds. In other words, you’re not actually getting equity in the company… you’re buying a gift card.

Think of it like the in-game credits you would buy (with real money) to get ahead in the old Facebook game, Farmville. Outside of Farmville, those credits are worthless.

With almost no information, and the obvious, inherent risks to buying a prepaid service, investors are supposed to evaluate if there’s a valid, secondary market for these tokens.

In the face of these many flaws, prices of these ICOs would soar. Not for any fundamental reasons… simply because we were experiencing a massive bubble fueled by hype.

And the prevalence of outright fraud caught the attention of the SEC.

One company called Prodeum was allegedly developing a blockchain for agricultural commodities.

Prodeum raised $11 million through an ICO. Then the founders (who were likely made up in the first place) disappeared without a trace. And the only thing left on the company’s website was a single word – “penis.”

Despite the many warning signs, companies have still raised nearly $9 billion to date through ICOs. And a lot of that money has simply disappeared. recently completed a study of the 902 ICOs that took place last year.

Of those, 142 failed at the funding stage.

Another 276 failed after either taking the money and running or simply failing as a business.

So a full 46% of all ICOs last year have already failed.

But it gets even worse…

An additional 113 ICOs, according to, are “semi-failed” because the founders have ceased communications with the public or because the community of users is so small there’s zero chance of success.

Once you add in these “semi-failed” firms, 59% of last year’s ICOs are goners.

Think about that failure rate… it’s astounding. And that’s in one year’s time.

I’m certain that percentage will only increase.

The vast majority (90+%) of cryptocurrencies and ICOs will fail for one simple reason… they have ZERO utility.

People forget, but when you participate in an ICO, you’re actually investing in a business. And that business has to provide value in order to justify its existence." (



  • "The market capitalization of all Cryptocurrency has risen from $7 billion in January of 2016 to over $130 billion as of now in September 2017." [3]


"By mid-July, tech firms raised about $1.1 billion in 89 coin sales this year, roughly 10 times more than that in the whole of 2016, according to data compiled for Reuters by crypto-currency research firm Smith + Crown.

Coin sales have already eclipsed funds blockchain firms received from venture capital, which invested over $300 million in equity in the sector in the first half of this year, Coindesk data showed.


Venture capital firms' digital currency investments still account for only a sliver of the roughly $19.3 billion they have invested in tech-related sectors in the first half of 2017, according to data from consulting firm PwC and research firm CB Insights.

According to, a new website that tracks initial coin offerings, these tokens trade on the exchanges at 20 times their initial sale price on average. That number is skewed by high-performing outliers and the median multiple is three." (