18 November 2018
Dave Chapman is one of the advisers in the OpenANX initiative, which raised US$18 million in its token sale recently. Photo: HKEJ
Dave Chapman is one of the advisers in the OpenANX initiative, which raised US$18 million in its token sale recently. Photo: HKEJ

Initial coin offering: A mix of crowdfunding and share sale

Bitcoin and Ethereum went wild in the first half of 2017, and the hype is likely to continue in the coming months, driven by the initial coin offering craze.

Initial coin offering (ICO) can be considered as an alternative form of crowdfunding, a way for startups to bypass “traditional” venture capital funding to raise money.

Many of the ICOs are using Ethereum’s platform. ICOs on the Ethereum network make it much easier for any person or company to issue digital tokens to its users via smart contracts; this allows developers to take advantage of it.

Startups are raising millions virtually, boundlessly and instantly through ICOs. According to research by industry publication CoinDesk, startups have raised US$327 million through ICO offerings in the first five months this year, which exceeded the US$295m raised through VC funding in the same period.

In June, web browser maker Brave raised US$35 million in under 30 seconds for its BAT token. A startup called Bancor, building a trading platform for ICOs, raised US$153 million in three hours. A blockchain startup called Tezos raised US$232 million in its token sale. A messaging platform and mobile browser developer called Status, raised more than US$100 million in less than three hours., the developer of EOS.IO software, a new blockchain operating system, raised US$185 million in the first five days of token sale.

“There are indeed speculators who do not know in intimate detail what [the ICO project] is, and they likely fall into the FOMO (fear of missing out) category. However, there are professional investors who do perform due diligence and furthermore fully appreciate the inherent risks of participating in such,” said Dave Chapman, managing director of Octagon Strategy, a Hong Kong-based digital asset OTC trading desk. Chapman is also one of the advisers in the OpenANX initiative, an Ethereum-powered decentralized blockchain which will utilize decentralized exchange protocols to allow cost-effective trading with reduced credit risk, which raised US$18 million in its token sale recently.

From more than 4,400 contributors participating in that token sale, Mainland China (376), the US (114) and Russia (90) are among the top three geographic regions of the contributors. “The majority of openANX contributors actually want to see the end, the finished product, and not speculating on secondary markets,” Chapman said.

According to Chapman, companies hoping to raise funding via an ICO need “an idea or a product”, and present it in a public “white paper”, a document explaining in detail the pitch of the future company and platform. The white paper would also contain operational details of the fundraising such as investment goal and cap, accepted currency, number of token to be distributed, duration of ICO campaign and any legal concerns.

Chapman also noted that its success is largely attributed to the reputations and history of those affiliated with the project.

While some of these startups have working products, others may have nothing except a white paper.

“There are no concrete regulations, no developed legal structures, and no enforceability, unless the token is very obviously a security,” said Aurelien Menant, CEO of digital currency exchange Gatecoin.

“Lots of these ICO projects are just selling on an idea, a dream. It’s like I decide to raise funds to invent a time travel machine, raising a hundred million dollars for research and development, then I can claim that after all the research that I can’t make it, and just run away with the money,” Menant said. “it’s just a matter of trust between the investors and the project founders.”

“If the ICO project team doesn’t build the application they promised, that token will have no value proposition. There is a huge risk,” said Thomas Glucksmann, head of marketing at Gatecoin.

The ICO contracts are unmodifiable and there is no central authority to force the initiator to refund victims. “ICO investors are in fact not venture capitalists; they are much more like angel investors, but actually many of them are just retail investors without the knowledge to make an educated investment decision. They are just swept up by the hype and dream of getting rich quick,” Glucksmann said. 

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See also:

Ethereum seen as hedge against financial crisis: Gatecoin

Ethereum has certainly gone through bubbles, says co-founder

A guide to Ethereum, the digital currency of the moment

Startups are raising millions virtually, boundlessly and instantly through ICOs.

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