With the growth of crowdfunding showing no sign of slowing, new innovations are beginning to take hold of the sector. One of these combines crowdfunding with another major trend in the financial sector – cryptocurrency.
Whilst its popularity still pales into insignificance when compared to that of both equity and rewards-based crowdfunding, raising money through Initial Coin Offerings is fast becoming a common alternative for the growing number of cryptocurrency companies. In 2016, blockchain start-ups raised around $200 million in Initial Coin Offerings (ICO), a new form of crowdfunding based on cryptocurrency tokens.
ICOs are similar to Initial Public Offerings (IPO) that see companies float on a stock exchange. In an IPO, the cryptocurrency company sells a proportion of its currency to early backers in exchange for money or, more frequently, bitcoin. These are then called ‘tokens’ – and is an easy way for new companies to circumvent the difficulties encountered during the process of raising money through venture capitalists or banks.
Supporters then hope that their cryptocurrency ‘token’ will be worth more as the company takes off. They can then sell it for the higher value.
So what’s the downside?
The main problem with ICOs is the lack of regulation. Several companies have been found to be fraudulent, something that is easy to when the ICO is not regulated by the Securities Exchange Commission. Funds that are lost due to fraudulent initiatives not covered by the SEC may never be recovered.
So is it legal or not?
AS a relatively new concept, the legal classification of ICOs and crypto-tokens remains uncertain. They borrow traits from both IPOs – in that a stake in the company is sold in exchange for payment – and traditional crowdfunding – in that it is offered on a platform and supporters are welcome to partake. However, it is clearly different from both.
The US Securities and Exchange Commission has so far remained silent on their classification and have made little attempt to clarify it. Preston Byrne, blockchain expert and COO at Monax, doesn’t believe token sales are legal:
“Real investments are legal in nature in that they specify the rights and obligations of the parties to them and have to follow certain, entirely arbitrary formalities to be valid and binding,” Byrne said in a Slack conversation with Techcrunch.
“And they rely on the courts for their enforcement.”
Tokenly
One such company cashing in on the trend for ICOs is Tokenly, whose motivation is to “empower crowdfunding with cryptocurrency”.
As a start-up it has created a platform to enable start-ups to providing rewards in the form of tokens. This then allows backers to donate, gift, sell or spend their reward before the product makes a profit or hits the market. The company says:
“You can buy, sell, trade, or rent tokens for any traditional currency, digital currency, or other tokens. Only token holders can use the goods tokens represent and only creators can issue more.”
Tokenly ran a crowdfunding campaign on BnktotheFuture in 2016 and has been met with overwhelming enthusiasm from investors. It was well overfunded, arguably showing investor confidence in the direction this funding technique is moving – Tokenly raised 708,000 euro, instead of the 329,088 target.