With 75% of ICOs now failing the reach their soft cap, the entire market has changed direction. This may also squeeze out the scammers and raise the bar beyond pure start ups entrepreneurs…

Our London correspondent Nick Ayton explores the very essence of an Initial Coin Offering (ICO) and the rapidly maturing market that is already very different from six months ago. It looks like we may soon see the end of the anonymous crowd investing in tokens.

Shifting sands…

There are several forces shaping the ICO market. We will always remember 2017 as the year the ICO took off. Will 2018 look entirely different and will it be better? Will there be more or fewer deals, will the size and scope of deals be bigger and will we see the end of the pre ICO?

A few months ago I predicted there would be 5,000 or even 10,000 ICOs in 2018 but now I remain less sure given the events of the last three months. And yes, what a few months it has been - with BTC breaking out from its resistance, hard forks and continual attacks, and the Ethereum network rocking and creaking as the ICO becomes its main use case. Transaction fees are rising and new kids on the block NEO, amongst others, trying to make up ground and then we have the pending Investor backlash at Tezos. Several more are likely to follow as investors make their voices heard… Crypto is on the march and is now unstoppable, I predict it will reach $500 mln in market cap in early 2018.

What a year it has been…

There are forces at work…

The volume of ICOs peaked in October 2017 as ICO money raised overtook VC money with approximately $2.5 billion brought into new projects, although $160 million was stolen and a lot of crypto returned to token buyers as soft caps were not met. It is clear 2017 could have been so much better, and what everyone wants to know how many ICOs were actually scams…

Regulation has been inevitable, like death and taxes, and the entire ICO spectrum has moved to consider the implications of not only existing banking and payment regulations but of new emerging regulations. There has been a continual stream of announcements from governments either banning ICOs, licensing them, and shutting some down while others are temporarily ignored. Then again, some governments have embraced the madness with support and open doors. China, Korea, Vietnam have locked things down, whereas Japan and Russia embrace the new capital markets, announcing new plans.

Others such as the UK have not yet declared their position, knowing eMoney Laws and Collective Investment Scheme Rules already provide a framework. Also, the FCA has set up a ‘sand box’ for various projects to test their propositions and then there is the USA who wants to exert influence across the globe when it comes to crypto, and like the UK provides a useful structure of exemptions covered by SAFT 506c.

All of the above furthering the debate, should crypto be Regulated, can it really be controlled and is Regulation just another attempt for the centralised Banking and Government to remove a threat to their supremacy. As a Libertarian I of course have some of these emotions, but I also want to stop the scammers, the idiots and the deceivers that are taking investment from people, the crowd with no intention of delivering anything.

99% of tokens are securities!

Founders who launched their token three or more months ago are now starting to worry, with parts of their anatomy churning and twitching.

Why? Because they are starting to realise they have issued a token that behaves like a security? That is, realising it is not a currency that greases transactions on a platform, or a voucher to earn or spend on the platform or loyalty rewards like air miles to be accumulated and use. Oh no…it is a security token then!

Hundreds of ICOs have indeed launched unauthorised financial products. Given that only a regulated or listed business can do this we have a BOOM situation! But hey, six months or a year ago the world was different right? There were no rules on ICOs, right? Wrong again. Banking and payment rules have been there day one, but founders believed they were in crypto land where the rules didn’t apply.

Buffoonary from legal community

Poor legal advice was and remains another big issue for ICOs as many lawyers can only be described as delivering ‘buffoonary’ behaviour. They have wrongly advised founders and told them to add a disclaimer. You know the kind. How many white papers have you read where the disclaimer says “we are not issuing a security or financial product,” when they are doing just that?! And it is this kind of thing that makes the SEC, Swiss and other financial regulators create a list of ICO founders to speak with, especially those that have raised tens, if not hundreds of millions, of dollars in the ICO process.

There will be legal reprisals and finger pointing and some lawyers will have their ‘words’ tested and their liability insurances called upon. “This ICO is not offering a security, nor is it offering a financial product as a pooling instrument, the founders have passed due diligence, they have a track record, they will deliver what they have promised in their white paper and they will conduct KYC on token buyers and create a governance structure that reports on progress,” honest!

PR vultures circling

Other forces are at work here. The PR and marketing vultures are enjoying a feeding frenzy as we have seen prices quadruple and more in recent months. Not to add more value, but because they can. And why not indeed in a free market? There is increasing competition for resources, companies are searching for those that genuinely have experience working on ICOs and demand is crazy.

Many new PR and marketing firms have been set up, all claiming they can help deliver a great ICO and raise the cash, with many traditional firms jumping into ICOs. But ask yourself this - why are 75% of ICOs are falling short? Is this the quality of the marketing effort or is there yet other more pervasive forces at work?

Reaching the right token buyer, dare I say ‘Investor,’ audiences is the secret sauce - provided of course you have a great proposition. Everyone is competing for their attention, with so many ICOs with great marketing gloss for the investor, and it remains hard to cut through the crap and fully understand the potential of a project.

But then the audience, the buyer markets, are also changing from the anonymous crowd to those who are identifiable, with more accredited (so-called sophisticated) investors taking part, VCs moving in and yes institutional money looking for a way in.

Marketing everywhere but unseen…

An ICO analyst team did some research on current ICOs and confirmed there was a direct correlation between the amount of funds raised and the marketing budget spent. And there is a two tier system emerging where the sites with all the traffic are becoming very expensive to use and harder to reach. Yet the free and cheaper listing and promotion sites that simply don’t have the traffic volumes to get the project seen by enough people.

Money talks, the biggest raise ICOs spend the most on marketing in the right places. Are we in 2018 therefore about to see the end of bootstrapping projects who simply cannot compete?

Time matters. Not giving the project sufficient time for what PR and marketing efforts have been made (paid for) to work is a problem. It takes time to build the interest, to drive traffic to the ICO website, to get the thousands of followers across social media and comms sites like Telegram, and cannot be done in three or four weeks. How many ICOs start their PR and marketing in the month they are launching and simply run out of runway?

Many ICO platforms adding to problem

There has been an explosion of new ICO platforms in the second half of 2017 and most of them are focusing on the money they earn and not the investor. Stack it high, sell it cheap. But some are not so cheap, as I found when I spoke to one desperate founder who had paid 50 BTC upfront for ICO services he was not getting.

Even some of the more well-known ICO platforms focus on volume and not quality, encouraging low soft caps and entertaining the unrealistic expectations of the founders just to make money. They get behind projects that make no sense, don’t deliver for investors and know full well they are part of a process promoting security tokens. And then there are other ICO sites, platforms or whatever you want to call them, themselves going down the ICO route to raise money. One has to ask for what, as it smells a bit odd.

Beware ICO platform having an ICO!

Ok then, which ICO platforms have issued a security?

Let’s get the ‘ugly baby’ out there, shall we…

Several ICO platforms have launched tokens that are clearly securities. Knowingly or unknowingly, they have. So what happens now?

They are part of a process that promotes an unauthorised financial product, supporting the issuing of a financial product, and they are neither listed or regulated to do so in any territory.

However, some ICO platforms treat launching a token as services supported by software code, where the obligation remains with the founders and smart contracts deliver the outcomes. But it’s very clear some ICO platforms, rather than helping the founders, are creating downstream problems.

Now this is the best one of all. There are founders that launch their own ICOs…this is way past the ‘ugly baby’ stage…

These naïve and often poorly advised founders write their own smart contracts they launch and start to collect mainly Ethereum into a single address and wallet. Not safe, not secure and they ignore current regulation covered by deposit taking and custodian rules. They accept, hold, store and then distribute tokens they have mined for crypto currencies, holding investor monies and converting it.

Yes, you can issue an app token pretty much any time to anyone. Write your smart contracts and you’re off. As many have done, provided the app or utility token is the currency, reward or voucher/points, entitles the holder to something (membership) of a platform already built. Yes built. However, if the app token is used to bring capital into the project, it manifests as a security, a pooling instrument, a gateway and ramp in, and they get something for it. They also get a means to make more of them and spend them. Otherwise you would be asking for donations from buyers, where the buyer gets what exactly? And the founders make money?

Pre-ICO should be outlawed

In 2018 will we see a different type of ICO project. Real companies, with real products, services and dare I say management with a track record, that can afford to pay the increasing cost of getting an ICO underway.

Are we seeing the end of the bootstrap project, do it on the cheap capital raising, as the real cost of an ICO exceeds $250k - $500k, putting it beyond many founders’ reach?

Will token buyers as investors reject the pre ICO completely because founders use it as a mechanism to raise money to spend on marketing that masks the fact they haven’t put much money in? Often they use the pre ICO marketing to hide the fact that they don’t have enough ‘skin in the game’ and where the risk of not reaching the public sale soft cap looms. They use investors’ money for developing the project and then marketing the concept phase and not something that is real, already been built.

Founders with nothing more than a concept should seek seed capital and go into an incubator. There are many investor groups that help founders with their projects that are simply not ready for an ICO. Is this the reason that token buyers are not falling for the hype, or are these buyers being squeezed out by the arrival of KYC and AML processes?

We already have some of our ICO clients running a Series A alongside an ICO which will be an emerging trend in 2018.

Token pumping linked to underlying asset

Look we all buy alts and tokens. We have all seen their value plummet 90% or more in weeks. The big issue for ERC20 tokens is how to create one that delivers for investors. The answer of course is to issue the token as a security where it is linked to something tangible and measurable in terms of value generated or created. It should be linked to profits, equity participation, dividends, voting and decision making (control) or where the token is linked to direct effort of the holder.

The token has to be linked to an underlying asset, a product, service or business with real revenues to have any chance of the token’s value being maintained. So when you are deciding which token to buy the questions are obvious. Will this token increase in value beyond the gains I can make holding ETH and BTC or other cryptos? Is the cause so worthy that it transcends traditional returns, delivering change and social impact and good? Or does it underpin a new economy you want to support, the tokenisation of movement, renewable energy, zero carbon lifestyle, sharing economy…?

Do it right the first time…

If you have a project and want to issue a token issue a security token.

Get help and do it properly. Work within the rules that offer a framework to get your token purchased by investors that have declared themselves. Get licensed in a jurisdiction that will support your venture, Gibraltar, Jersey, or Isle of Mann to name a few…

Work with ICO platforms that can issue a security because they work with and are integrated with regulated broker firms. Find some that have created token launch assets that work in a regulated market under the guidance of regulators and leading crypto lawyers. Find platforms that can issue a security, receive crypto currency, act as a custodian holding investor monies and are able to move this capital around in the right way.

Founders have an obligation to do it right first time and to ensure investors are protected, including post ICO services for investor comms and governance. This way they avoid the lawsuits, calls, actions and the ultimate collapse of the project, or where the regulator steps in and demands the money be returned.

After all it isn’t your money, it’s someone else’s.