2017 started the massive wave of cryptocurrency adoption across the globe and sparked a new trend of startups called Initial Coin Offerings (ICO). ICOs are a cryptocurrency comparison to a stock’s IPO. It’s the first chance that regular investors have to purchase a company’s cryptocurrency. Throughout 2017, cryptocurrency startups raised $5.6 billion through ICOs.
Stocks that have an Initial Public Offering (IPO) are selling their company’s shares to the public for the first time. Cryptocurrency investors jump on ICOs in the fast-paced environment for similar reasons, to invest in the coin before the masses, and hopefully, have the best chance at a profit. ICO investors usually see it as a brilliant opportunity to purchase an ICO coin before it hits an exchange.
Once a cryptocurrency hits an exchange, especially a more popular and widely used exchange, its trading volume increases and usually leads to an increase in the coin’s price. However, regulations in the U.S. have made it extremely difficult for U.S. investors to participate in an ICO. The Securities and Exchange Commission (SEC) has deemed cryptocurrencies to be securities and thus subject to securities law.
In response, many cryptocurrency startups are taking their coin offerings and operations offshore, and excluding U.S. investors from their ICO fundraising efforts. This has helped many new cryptos circumvent the onerous securities laws by the SEC.
While the SEC has put up major hurdles for cryptocurrency companies to operate in the U.S., other jurisdictions have made the push to create a friendlier regulatory environment. Wyoming recently passed a bill that recognizes cryptocurrencies as utility tokens rather than securities if they meet specific criteria. This can be a real game changer as crypto startups can get around securities laws by using Wyoming as their jurisdiction and their token qualifies.
However, there is a lot of reason to believe that security tokens are actually a good thing and are here to stay. Many companies are catching on that tokenized securities hosted and stored on the blockchain are a secure and reliable way to deal with the ownership status of their company. And a huge reason for the security token push will be because institutional capital is looking to invest in cryptocurrency and will want to invest in securities that have regulatory oversight.
Institutional investors are much more likely to invest in a cryptocurrency that offers token holders a share of the company’s profits. And all transactions and exchange of tokens are transparently recorded on the blockchain and easily reviewable. Dividend payments are automatically determined by the allocation of tokens for each registered wallet address. This type of cryptocurrency structure is much more attractive to institutional investors.
Cryptocurrencies Turn to Equity Crowdfunding
In 2012, President Obama passed the JOBS Act (Jumpstart Our Business Startups Act), which included new regulations for equity crowdfunding. Regulation A+ allows businesses to register with the SEC and offer securities to investors, and the real benefit is that investors can be non-accredited, so companies don’t have to limit their investment opportunity to just millionaires.
Equity crowdfunding is a very similar strategy to the ICO market. Companies build out an investor landing page that is intended to provide as much information as possible to entice investors to buy shares of their company. Investor funds are held in an escrow account until the minimum threshold is met, and companies can use this tool to raise up to $20 million in Tier 1, and up to $50 million in Tier 2.
ICOs that want to take advantage of U.S. investors and the security token trend, and potentially be in a better position for institutional investment, are turning towards equity crowdfunding to raise the capital required to make their business a reality. Instead of using a traditional venture capital method, equity crowdfunding allows companies to raise that same capital from a group of investors, and build an original community around the business from the start.
This is a massive draw for the cryptocurrency businesses. Many ICOs succeed, and their cryptocurrencies thrive on the open markets because they were able to build a large and active investor community of people that hold their tokens and are strong proponents of their business offering.
StartEngine Leading the Charge
StartEngine is a popular platform for companies to host their equity crowdfund investor page and take investment through their backend system. Recently, they have seen the trend emerging with the potential for cryptocurrencies to use the equity crowdfund model to raise funds, and have incorporated that into their business offering.
ICOs that use the platform for their token sales can leverage the StartEngine community of 145,000+ registered investors that have participated in launching over 150 companies through the platform.
StartEngine, which is located in Los Angeles, California, recently hosted the ICO 2.0 Summit in L.A. The day conference was geared towards ICOs and giving them the information to succeed in today’s challenging regulatory landscape. Speaking topics ranged from discussions on The Regulated ICO to answering questions about security tokens, to discussing The Regulated Blockchain.
ICO entrepreneurs were given time at the stage for ICO pitches, which offered 5 minutes to present along with 10 minutes of Q&A from the audience. The summit’s workshop focused on giving ICOs all the information necessary for registering their tokens for a Regulation A+ crowdfunding round.
Through the equity crowdfunding model, StartEngine has attracted a handful of ICOs to sell their security tokens through the platform.
Ridecoin is an example of an ICO that’s currently taking reservations for security token investments on the StartEngine platform. They are working to build a decentralized ride-sharing network to enter the playing field with Uber and Lyft. Interested investors can visit their investor landing page to read up on the company and see an overview of their business’ value proposition. They also have their whitepaper linked on the page as well.
Overstock’s highly touted ICO was also launched using the StartEngine platform. tZERO is the blockchain platform that a subsidiary of the Overstock team, led by Patrick Byrne, is developing cryptographically secure blockchain ledgers with existing market processes in place to help reduce transaction processing times and fees.
MedChain, a popular healthcare related ICO, previously raised close to $500,000 using the StartEngine platform. They are building a blockchain based solution to create a secure and transparent framework for Electronic Medical Records to help improve the quality of patient care and reduce healthcare provider costs.
Other blockchain based technology businesses have successfully raised significant capital to fund their development operations. Indeco and NetObjex both raised over $100,000 through the platform earlier this year. As the trend towards security tokens continues, and the push to make cryptocurrency investments and token sales more attractive to institutional investors, ICOs will start to use the equity crowdfunding model more and more.
Investors that want to participate in the equity crowdfunding movement can look to StartEngine, or other popular platforms like SeedInvest, WeFunder, and Crowdfunder. This gives investors a similar opportunity as the booming ICO market from last year, where tokens are selling to the public before listing on an exchange. If you’re interested in participating in an ICO, but have found it difficult due to the more stringent regulations, equity crowdfunding might be the perfect fit to stay in tune with the emerging ICOs.