Startups normally raise money from venture capital or seed funds, from banks, or via crowdfunding. But recently, blockchain technology has produced a new possibility: initial coin offerings (ICOs), where instead of issuing equity, debt or perks, entrepreneurs launch a virtual currency, in the form of a coin or token.
ICOs, which skirt normal financial regulation and allow companies to go directly to investors, have proved hugely popular and yet hugely controversial. A cross between crowdfunding and a conventional equity IPO, they could be the future of finance, heralding an entirely new way to raise funds. Or, critics say, they may be a flash-in-the-pan: a hot 2017 craze that falters before it gets stable footing.
To Paul Allard, CEO of newly formed Impak Coin, ICOs offer an opportunity to get more capital to socially beneficial companies and to break the stranglehold of traditional players in the startup financing market. The money raised from Impak Coin, which is now on sale and has raised more than $1 million so far, will go to fund impact-type businesses (that is, companies that produce a social return as well as a financial one). Allard hopes to build a wider “ecosystem” of investors and companies–including a fully fledged bank–outside the traditional financial realm.
“The system will help ordinary citizens to spend their money in a company that is accredited and recognized as social impact company. It will help these companies raise their capital and their sales,” he says, in an interview. “If, as an investor, I have a couple of thousands of bucks, I can’t participate in the impact investment world. But with this app and platform, you’ll be able to do it.”
Dozens of mostly blockchain startups have launched ICOs in the last 12 months, issuing coins and tokens to buyers that have grown to a value of hundreds of millions of dollars. The largest so far–for blockchain startup Tezos–raised $230 million in just two weeks. With names like CompCoin, Blocktix, and SkinCoin, the ICOs come from different industries, from financial services to online tickets to electronic sports, and offer different types of currency.
Some ICOs are “token sales.” That means buyers are purchasing the right to participate in the company, for instance, to buy its products and services once they are available. One token might, for example, buy data storage or cybersecurity services with a new startup that has yet to launch. Other coins give buyers actual ownership of shares, or future profits, and are more akin to digital stock certificates. Tokens and coins are normally tradable in secondary exchanges, as investors speculate that their value could rise, or fall, over time.
ICOs, which have raised more money this year than early-stage VC funding, have raised worries that investors (or issuers) could be harmed in the process. Even Allard agrees that the market is frothy, like the dot-com internet boom of the late-1990s. Last month, the U.S. Securities and Exchange Commission said it might class some of the virtual currencies as securities and therefore subject to its regulatory oversight. And Chinese regulators have declared ICOs in that country illegal. The news prompted worries of a widespread crackdown and a dampening of interest in the coin market.
But, assuming regulators find ways to encourage ICOs rather than completely killing the market, ICOs may offer a rich opportunity for startups with limited means, particularly those with a social purpose bent, which may not offer huge returns. Everyday investors are currently limited in their impact options, having to make do with screened mutual funds and robo-advisers (which put your money into public companies) or equity crowdfunding and community notes.
“With ICOs, you open up the whole world. Anyone can be an investor and judge you on the services you deliver to the public,” says Demetrios Zamboglou, chief business development officer with Lykke, a Swiss cryptocurrency exchange that helps companies with ICOs. “In a way, the technology acts as a venture capitalist–as a gateway to the public. And it’s probably very alarming to the VCs.” ICOs, in other words, allow companies to avoid paying fees to investment banks to organize conventional public offerings and leave out VCs from the process of connecting entrepreneurs with people who can fund their businesses, as well as being open to investors with smaller amounts of cash to offer.
Impak Coin, which is based in Montreal, has the advantage that its business model has already been scrutinized by local regulators. Earlier this year, authorities there set up a “regulatory sandbox” giving blockchain companies, like Impak Coin, guidance on where its business model may run afoul of existing rules. For example, it persuaded Impak Coin to tighten its know-your-customer requirements (so it knows the identity of every investor) and bolster its money laundering controls. Allard claims that Impak Coin is the first ICO in the world that’s fully compliant with local securities laws. In the main, he says, ICOs have flourished in the markets where regulators have paid least attention, including Hong Kong and Poland.
You can buy Impak Coin with Bitcoin, Ether (the token used on the Ethereum public blockchain), or with a credit card, downloading the currency to an electronic wallet. From there, you can buy products and services using the coins from social good startups that are part of the Impak Coin network, or make payments to other coin-holders. Crucially, the system rewards people for usage: you gain tokens as you download the impak.eco mobile app, invite others to join the network, invest in the Impak fund, or purchase additional coins.
Impak hopes to generate at least $10 million by issuing 12 million coins. The crowd-sale closes on September 20, with the coins due to be distributed to impact businesses in 2018. Allard hopes those businesses will include more than 2,000 B-Corps accredited by B Lab. He says he’s in discussions with the nonprofit about automatically bringing accredited B-corps onto the platform, so they can receive Impak Coin investments. Such a partnership would, in effect, create a parallel universe for investing in public good businesses. Capital, once raised in the form of cryptocurrency, would be re-invested in social good companies, who in turn would be able to set up real operations to do real projects. At the same time, Impak Coins will be tradable, like Bitcoin or Ether.
There are already examples of cyber-currencies and ICOs for social-purpose type businesses. SolarCoin rewards people for installing solar panels. Tree Coin, which is planning an ICO for September, gathers resources to planting trees in the developing world (as one way to fight climate change) and rewards local people for maintaining those trees.
Civic, a digital identity startup, raised $33 million in June with a token sale that was sold out in days (the company claims it could have raised $100 million with a longer sale). CEO Vinny Lingham is skeptical that early-stage startups that don’t involve the blockchain can do something similar, as ICOs require in-depth knowledge of cryptocurrencies and a decent website. Token sales–which allow buyers to buy into products and services– are easier to organize than coin offerings (which offer ownership and profits), he says.
“I’ve seen guys throw together silly business plans with no real need and use-case for tokens, and then they try and issue a token to raise money,” he says in an interview. “I don’t think that’s going to fly. You can probably raise more money through donations. You have to be able to produce something worth tokenizing, because there’s too much competition now for this channel.”
However, the growth of blockchain-based financing raises the possibility that investing in startups may become easier, and more democratic, in the future. Though ICOs are somewhat geeky and hard to understand at the moment, they’re likely to become less impenetrable going forward, just as the internet itself went mainstream. Moreover, projects like Impak Coin take the burden away from startups to do fundraising themselves, like Kickstarter and others, have done for crowdfunding.