$5billion raised in 2017. Not just a bubble and crazy kids.

ICO stands for Initial Coin Offering. The term is taken out from the finance sector with the IPOs.

Through an IPO, a company sells shares in exchange for cash coming from private sector savings account. People who believe in the project invest in it, expecting they will get dividends in return or get implicit returned value through significant price increase. It is a constraining and highly controlled way to raise funds.

IPOs offer a significant number of advantages:

• Increase company’s visibility

• Reduce cost of capital

• Increase liquidity to share owners

• Attract best managers with preferred shares

• Ease future acquisitions

In exchange for:

• High legal, accounting and marketing costs

• Mandatory publication of financial and corporate results

• Time consuming for management

• Fund raise much lower than expected

• Loss of control over the company with new part takers

ICO money raised in 2017: source Forbes 2017

ICO and IPO, a different approach to value creation

When a foundation or a company sells tokens, it does not sell company shares. It does not promise a share of the profit. Through an IPO, the buyer acquires a part of the network to come. They believe in the potential of the network, and the solutions it provides to business problems. But the network does not exist.

Yes, an ICO may increase the corporation visibility. However, most of times, before the ICO, the company did not even exist, hence the very speculative nature of the program. It does reduce drastically the cost of capital. It is implicitly free as opposed to conventional fund-raising mechanisms. The company survives with the cash it collected, most of the time from other crypto-currencies.

It does not increase share owner liquidity. The liquidity increases with the quality of the development done. The quality is a two faces coin: it answers to business needs and the underlying code (the protocol) is of high quality. If at least one of these elements is missing the project fails. Assuming the code is good, yet useless, the token value depreciates. If the code is bad, the business cannot be satisfied on the long run, assuming it ever did. Hence, ICO projects are very demanding.

IPO: a better protection against scam

The legal costs underpin investors protection against scams. Truly we are missing something here with ICOs. Know Your Customer (KYC) procedure should be created for every ICO. No one wants to see hits project tainted by money laundering cases. A technical mandate should be created each time an ICO is proposed before being tolerated in the country of origin, with a serious normalized study. At best, for now, a whitepaper exists.

A permanent price manipulation control may be put in place thanks to algorithms.

All the rest regarding legal expenses seems to be mere past incentives that no longer stand for current situation. All transactions are transparent. We know who purchased the tokens based on the address and a partnership with trading exchanges around the world. All this paperwork, information gathering, meetings, roadshows, market authority, auditors and so on may definitely be squeezed out. Definitely ICOs are much more cost incentive.

No marketing for ICO?

No shortcut exists for marketing or so it seems. Yet, while 10 years long business rose a few millions in the US with hundreds of dollars spent on marketing, Filecoin, Tezos, EOS, Tenx, MobileGo, Snom, Aeternity, Monetha all lifted more than 30 million. Marketing campaign was limited to a one night work on a website and a whitepaper.

Accounting is nowhere different from marketing expenses. The process may be eased thanks to the decentralized ledger. However accountants around the world know how insignificant this part of their job is as opposed to the rest of the tasks they have to manage, e.g., social issues at the corporate level. How many foundation face significant social issues?

The publication of public results is made mandatory for Foundations. Costs, yet are contained and no audit seems to be required so far. Definitely an improvement is required here.

The time required for politics and associated information does not show signs of simplifications with an ICO as opposed to an IPO. Founders may be knowing each other’s for decades. Internal issues may arise as witnessed on the TEZOS ICO.

The amount of funds raised is a troublesome case. In corporate finance, hundreds of people work together to make the best estimates, partner with other banks to leverage funds and make the best offer. While cutting significantly this overhead, the ICO introduces a high level of uncertainty and amateurism. First days and weeks seem to show signs of instability, much like other IPO.

The loss of control is not necessary.

Some Blockchain projects offer endogenous improvement mechanisms. This implies that the token ownership provides little to no power on the market. In turn, the plutocratic governance becomes a technocratic monarchy. It is maybe not what is expected by investors. The other solution grants power associated to the token. This is typically our modern world when it comes to business. This may be troublesome for the founding team. Assuming they unleash too many tokens at once, an institutional investor may force the team toward an undesired direction. Unleashing too few and investors will fear for price dilution.

In other words, an ICO is definitely a place where a sheer layer or regulation is required to protect investors from scams. Nevertheless, the regulation required implies a high level of technical background in informatics, banking and legal aspects. Definitely new jobs will emerge. Even though such expenses may arise, current state, and probably future state should provide a way for investors to express their need for new ideas.

Photo credit: Splitshire