Initial Coin Offerings Are a Mess - Week 11

Massive ICO Fundraising Is Under Fire

Following Facebook’s decision to block all ads related to сryptocurrencies and ICOs, Google announced last week that it will do the same by June 2018. The threat is real. Instagram, also affiliated with Facebook, blocked a promotion of our mascot dog's account whose name is Bitcoin. We appealed, but they didn't change their decision. These measures were best explained by Scott Spencer, Google's director of sustainable ads: "...we've seen enough consumer harm or potential for consumer harm that it's an area that we want to approach with extreme caution", he said.

Initial Coin Offerings appeared on a large scale out of nowhere during the middle of last year. This new way of raising money had been known before, but nobody really took it seriously.

It was the end of 2017 when the investment industry ― from Silicon Valley to Wall Street and beyond ― started scratching their heads. $5.6 billion was raised through "initial coin offerings" in 2017, which was shy of 10% of all venture dollars invested in the US. The big question ― will ICOs replace venture and private equity capital?

The Security and Exchange Commission wasn’t supportive of this fundraising tool, and unlike with crowdfunding, it made no effort to develop a new legislative framework. Rather, it simply equated ICOs to IPOs with all the draconic restrictions and requirements.

That didn't stop entrepreneurs, however, and just by March this year, ICOs raised over $1.6 billion. This is when SEC switched their neutral defensive stance to an aggressively offensive one. Subpoenas started rolling in from the SEC, and while most of the enforcement actions have targeted clear cases of fraud, the industry is expecting the change.

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Wyoming Wants to Be a Safe Harbor for ICOs

The state of Wyoming has always been cutting edge when it comes to entrepreneurship and is known for an entrepreneur-friendly business environment. It remained the same toward the crypto market as well.

Over the last several weeks, Wyoming passed five bills related to blockchain and cryptocurrencies, which became the first step to clarify how cryptocurrencies should be regulated and get the US Congress to take the matter seriously.

The main threat for ICOs comes from the US SEC, which views them as traditional IPOs, because the digital assets offered by ICOs are treated as securities. Although, this approach makes some sense, crypto assets are definitely worth their own legal framework.

Wyoming sets such digital assets — also known as “tokens” — as a new asset class, which upon meeting certain criteria, excludes their “developers or sellers” from securities laws, or as the bill states:

“A person who develops, sells or facilitates the exchange of an open blockchain token is not subject to specified securities and money transmission laws… (provided that) the purpose of the token is for a consumptive purpose, which shall only be exchangeable for, or provided for the receipt of, goods, services or content, including rights of access to goods, services or content; and the developer or seller of the token did not sell the token to the initial buyer as a financial investment”.

So Will Initial Coin Offerings Replace Venture Capital?

Although traditional venture capitalists remain bullish about their position in the entrepreneurial community, many of them are also trying to stay relevant in the new market and invest in ICOs, or prior to them. With recent legislative developments, chances are high that you may also find yourself in these positions, so you'd better learn more about ICOs today.

Not only did Wyoming become the first state in the world to pass a bill that clearly defines digital assets, all five bills created and lobbied by Caitlin Long, co-founder of the Wyoming Blockchain Coalition, are meant to drive innovation in various ways.

Does it mean that venture capital investors will see less of worthy startups in their portfolio?

The classical approach of venture investors is based on the concept of “smart money”, which includes a valuable advice, broad network and investors' know-hows for strategic development in addition to cash. There is, of course, the opposing concept of “dumb money”, meaning that investors provide only financial support with no practical help.

Critics of ICOs equate them to the latter, completely forgetting the many cases when startups faded away or couldn't start developing due to lack of funding, which in turn occurred because of the investors' different bias. ICOis a key to financing for many underrepresented founders such as women or ethnic minorities, therefore, when venture capitalists remain unresponsive, it becomes yet another source of funding. There’s no argument here since it gives entrepreneurs another chance. We should also expect many innovative business-models built on blockchain and tokenomics.

In other news:

  • Famous rapper and entertainer Snoop Dogg has announced his debut venture firm, which just closed with $45 million. As we've been saying for some time, background is irrelevant to becoming a venture investor. Skills and knowledge are. This is why we built VC Academy. If others can do it, you can too. Learn how to be a better VC every day.

Recent Industry Reports And Studies (free instant access):

2017 Annual Unicorn Report by Pitchbook
2018 Private Equity Report By Bain'n'Company
FAMGA Earnings Call Analysis by CBInsights

CBInsights looked at which peers each FAMGA company talked about and found that Apple and Google are clearly on each other's minds. Amazon, on the other hand, has nothing to say about the competition.


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