The Initial Coin Offering
An Initial Coin Offering (ICO) is much like an initial public offering (IPO). An IPO is where a private company takes their company public, and allows people to purchase shares on the public stock market. The Ethereum blockchain made it very simple for people to create their own tokens, and sell them to the public. These tokens represented a variety of things, depending on the project. The tokens ranged from being a “new cryptocurrency”, to being a stake in the project, like a share in a company. The problem was that virtually none of these sales were registered with any world regulatory bodies. Typically, if a company wants to sell shares, or an investment contract, they need to be registered with a regulator.
This is why Kickstarter is able to do what they do. They place various caps on the amount that can be raised. Furthermore, they insist that the backers get something in return. Kickstarter does not allow project backers to receive a share in the company they are backing. In short, I cannot sell investment contracts on KickStarter.
An Efficient Fundraising Method
One thing can be said about using cryptocurrency for fundraising, it is efficient. Due to the peer to peer nature of cryptocurrency, there are no middle parties between you and those who are receiving the funds. If the fundraiser is global in nature, then reconciling tens of different currencies is not a problem either. All funds received would be denominated in your currency of choice. May that be bitcoin, ethereum, or even USDT. After receiving the funds, you are then able to convert it into whatever currency best suits your needs. On top of being efficient, a permanent record and receipt is generated instantly after the funding. That receipt is irreversible, and public, creating a trail of documentation which is also required by regulators. If properly leveraged, blockchain technology can be a great platform for getting money to worthy causes in a short period of time.
Crowdfunding for Everyone
Typically, venture capital is not something anyone can get into. Even if you wanted to invest $10 in a startup, you cannot. Most of the time, you will be capped by minimum investments, as well as financial income requirements. That’s right, you need to be wealthy enough to invest in startups or projects that could make you wealthier. This is called being an accredited investor. Most countries have requirements on your financial status before you are legally able to become an accredited investor. In some cases, you may invest in startups as part of a fund or pool if you do not meet the requirements for being an accredited investor.
What cryptocurrencies allow people to do, is invest in projects as they see fit. If an individual knows how to use the technology of cryptocurrency, then they are able to invest in whatever project they like. I appreciate the protection that the government is intending on providing newbie investors. However, I believe that adults should be able to take risks with their money. Becoming an accredited investor makes forever be out of reach for middle to lower class citizens. This fact lends ever more credence to the phenomenon of the rich getting richer. One thing that helps the rich get richer, is opportunities such as being an accredited investor.
Crowdfunding Done “Right”
Crowdfunding with cryptocurrency is a very complex topic. On the one hand, having no regulation at all means that the space is rampant with scams. On the other hand, too many restrictions mean that the lower to middle class does not get flexible access to investment opportunities. A middle ground must be able to be crafted, and I believe this is possible.
There are a number of different platforms that automate the process of creating regulatory compliant tokens. Much needed authenticity and legitimacy is needed in the cryptocurrency space. A platform that forces tokens to comply with regulations, while allowing small investments is just the sort of middle ground I alluded to above. A platform that filters out the obviously bad investments will significantly decrease the risk for investors. Only tokens or projects that meet the requirements will be allowed to be funded through this platform.
That is not to say that the risk does not exist. Investors must be aware that even a project that is regulatory compliant may fail. This is simply the risk that experienced investors are aware of, and are prepared to take. A well known fact in the startup community is that 9 out of 10 startups fail. Cryptocurrency projects have an even higher rate of failure, mostly due to the fact that most of them are outright scams. A little filtering can eliminate the scams. There is a 100% chance that you will lose your money if you invest in a scam. This is the type of project we want to eliminate from the project pool.
The Future of Crowdfunding
At the time of writing, there is not a single platform that stands out as the goto place to find worldwide regulatory compliant projects. It does appear that the world of investment takes two steps forward and one step back. Some companies are creating platforms that filter projects based on American regulations, but then what about Canadian, or European investors? What the cryptocurrency world is yearning for, is more of the legitimate projects that emerged from the 2017 cryptocurrency boom. The ease of investing in those projects, with built in legitimacy, without the weight of the regulatory bodies slowing the pace of investment.