Initial Coin Offering

Description

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.

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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." (https://www.nytimes.com/2017/10/27/technology/what-is-an-initial-coin-offering.html?smid=fb-share)

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." (https://www.theatlantic.com/technology/archive/2017/05/blockchain-of-command/528543/)

How-To

Utility Tokens

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." (https://www.forbes.com/sites/chancebarnett/2017/09/23/inside-the-meteoric-rise-of-icos/#2e010b515670)

Discussion

1.

"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.

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"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." (http://economictimes.indiatimes.com/articleshow/59733522.cms?)

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’." (http://www.ethicalmarkets.com/report-of-the-san-francisco-conference-the-future-of-money-and-technology-by-marc-strauch/)

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." (https://www.nytimes.com/2017/10/27/technology/what-is-an-initial-coin-offering.html?smid=fb-share)

Status

"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.

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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 tokendata.io, 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." (http://economictimes.indiatimes.com/articleshow/59733522.cms?)