Initial Coin Offerings (ICO) and token sales make headlines every day now, with news of entrepreneurs getting massive crowdfunding, and all of a sudden it seems that everyone has a whitepaper and is getting ready to launch a new ICO. I scouted the web for recent practical advice to ICO planners.
A good starting point is Startup Management, a blog edited by William Mougayar, the author of “The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology.” Most of the latest posts at the time of writing are about ICOs and tokens. The last is titled “10 Things I Don’t Like About ICOs.”
ValueWalk presents a breakdown and analysis of ICOs since 2014, noting that Switzerland is becoming an ICO hub. “Associations can form token-backed sub-entities in order to carry out development of specific crypto projects which aim to ultimately generate revenue,” notes the post.
A common and dangerous perception is that an ICO is like an Initial Public Offering (IPOs) of a company’s stock without oversight by regulatory authorities like the SEC. The perception is dangerous because, you see, if your ICO is really an IPO with a different label, the SEC will jump in and you will be sorry. This point is well presented by Kiki Schirr in a post titled “What is an ICO and what does it mean to new businesses?.” The difference between your ICO and an IPO must be “BIG,” says Schirr, “or the SEC will come after you!”
“An IPO would be owning United Airlines stock, and an ICO would be owning United Airlines mileage points,” explain Schirr to make the necessary differentiation clear. A recommended practice is to avoid calling your token sale an ICO. Call it something else, perhaps crowdsale or “Token Generation Event.”
Schirr links to a recent TechCrunch article titled “How to stage an ICO (and answers to other lingering questions you might have),” where writer Connie Loizos and expert Stan Miroshnik, who runs a digital finance-focused investment bank, zoom on the “Howey Test,”used by US regulators for determining whether certain transactions qualify as investment contracts.
“If they do, then those transactions are considered securities and are subject to certain disclosure and registration requirements,” explains Miroshnik. “When tokens are structured basically as the sale of a service or product, they’re designed to make sure the various prongs of the test are not triggered.”
“The term ICO is really a misnomer for what are token sales or token crowd sales,” adds Miroshnik. “Token holders are effectively prepaying for a product or service. If I run a video game company, for example, I can sell you tokens that represent in-game purchases once the game is built.”
In general, according to these and other experts, tokens should not represent fractional ownership of a project, but access rights, use rights and payment means within the project’s ecosystem.
Vitalik Buterin weighed in with a June post titled “Analyzing Token Sale Models.” Based on current and past token sales, Buterin asks and tries to answer the question “what would a good token sale mechanism look like?” Very worth reading and bearing in mind.
Picture from Wikimedia Commons.
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