ICO Saptapadi- The Seven Steps of an ICO
What is an ICO?
With the recent ‘pentathonic’ surge in interest in cryptocurrencies and their foundational technology, Blockchain, many startup companies in this space have sprouted all over the world. By some estimates, there are more than two thousand Blockchain related startups in almost all industries ranging from finance, healthcare, banking, global supply chain management and to the social media as well. This explosion in number of startups has naturally attracted more than the curiosity of investors (Fig:1) who have piled up more than $5B in total investments as of the end of 2017 and more than $3B in 2017 alone. A Blockchain startup, Block.one, raised $4B in investments by issuing EOS tokens on the Ethereum platform
All this activity reminds one of the early and mid1990’s when the worldwide web and the internet were getting born. People armed only with ideas could raise lots of funds through an Initial Public Offering(IPO). A prototype or a minimum viable product were not a prerequisite to show to anyone. Well, those heady days have returned almost after 25 years and after a generational change! This time, in the Blockchain/Bitcoin era, when the millennials have begun to have babies, IPO’s have a new virtual ‘crypto-cousin’, the ICO, which stands for Initial Coin Offering. The investors’ interest in ICO’s is not surprising- the global Blockchain economy is forecasted to grow 8 times in 8 years (Fig:2) from 2016 to 2024 and ICO’s are red hot right now (Fig:4) as a vehicle to raise real money in real dollars!
Why not an IPO?
It is more than a natural curiosity to ask: why these Blockchain-based startups are not going for an IPO just like in the days of the internet startups and like any other company which wants to raise funds from the public? First of all, these startups are not selling shares in their companies or convertible notes to be converted into the shares of the company at a later date. They are selling ‘coins’- the crypto coins, the virtual tokens. You give them money in real fiat currencies and you own a number of virtual tokens, the crypto coins, the company has ‘minted’ or ‘mined’ in a finite number, thus deflationary by design. This is a fundamental point to understand: the value of the investment has been decoupled from the operations of the company and its value over time is unlike any fiat currency which is inflationary in nature! This decoupling of investment from the company’s operations has many implications, but we will not be going into those in this article. It is worthy to note for now that the investment value will depend on the exchange rate of the token with a fiat currency at any given point in time. This is true for the ‘King of the Coins’, the bitcoin, as well as all its cousins, the alt-coins. There is no company underlying the bitcoin whose operations will impact the value of investment in bitcoins. There will be 21 million bitcoins in total as ‘ordained’ by Nakamoto-san(Fig:3) and as less and less are available, more and more they will cost in dollars, just like when gold used to be the standard! In USA and in other countries, the Security Exchanges do not have laws and regulations yet to handle this decoupling of investment from the worth of the underlying assets of a company. As long as this remains the case and
Fig:3 Number of Bitcoins Over Time
Fig:4 ICO in Progress, we’ve an idea!
the governmental laws of a country do not support it, raising investment funds for Blockchain related startup companies via the IPO route will be very hard for their projects. They will continue to use the ICO route by offering their coins for sale (Fig:3). As long as there are buyers, tokens will be sold in millions as it is happening now. To some, it might ‘smell’ like a Ponzi scheme, to many others, it is a lifetime investment opportunity.
Top 10 ICO’S
- Block.one – $4.0 billion
- Telegram Open Network — $1.7 billion
- Dragon Coin — $320 million
- Huobi — $300 million
- HDac — $258 million
- Filecoin — $257 million
- Tezos — $232 million
- Sirin Labs — $157.9 million
- Bancor — $152 million
- Bankera — $150.9 million
The ICO Saptapadi- the Seven Steps:
This brings us to the question: how do the new Blockchain based startups prepare for an ICO? What are the steps required to raise funds through an ICO? At first, it might seem that the steps required for an ICO are drastically different from raising funds through a traditional IPO, however, on a closer look, one will find that there are many similarities between the two. For example, people and institutions who will ‘give you their money from their pockets to your pocket(startup)’ need to understand what you are planning to do with their money? Who are the people involved? What are their backgrounds? Can they trust the folks involved with the startup? These are some of the starting points to get to understand when planning for an ICO and they are not dissimilar to when companies plan for an IPO. While one can think of several steps involved from the birth of brainwaves about an ICO to its execution, there are seven major steps which need to be taken when thinking about an ICO, planning for it and executing it. I call these seven steps ‘ICO Saptapadi’, the seven steps Indian brides and grooms take during their Vedic wedding ceremony, which are described below.
Step # 1: Build Trust
Here is the context: You are a startup in a brand new technology space called Blockchain. Not many people have heard about it, not many people know about it and those who have heard and know about it, do not understand it. ‘Cryptographically linked blocks of data’, what is that? And to top it all, your company is new, it is a startup, it has no operational history, no one knows the folks involved (not true in all cases). What do you do? How do you get money from ‘other people’s pockets to your startup’s pockets? According to ICO saptapadi, the very first step a startup must take is to start building trust. Trust will be your best Token as you walk on this token trail!
Step # 2: Be Known
Being known to others is a great next step. How do you do it? Write whitepapers, publish articles, write and post blogs, create a great website on the startup or related to the startup as a precursor to and much before the ICO launch. Let the world be convinced that you know what you are talking about. Do not depend upon people searching for your name on the internet to get to know about you! Create your official and truthful biography and publicize it far and wide. People invest money in people ‘they feel they know’. Getting to know about the bright ideas of startups goes hand in hand with getting to know the people behind them, so ‘Be Known’ to others in an authentic way! People all over the world are looking for authenticity and authentic leaders. This will go a long way to build ‘Trust as your best Token’.
Step # 3: Choose the ICO Geography
Next, you must look at many geographies and countries to choose from for your ICO. The choice of your jurisdiction will tell you who would be your regulators in the country of your ICO and also how the country of your domicile and where your startup is based relate to the country of the ICO. There may be a temptation to launch an ICO in countries which are known for being a haven for ‘black money’, like Switzerland and Liechtenstein and many other island countries. Such a temptation should be heavily weighed against the long arm of the law of the land catching up with you! It will be especially painful when your startup is based in a globally powerful country and the country has the wherewithal of how ‘to smoke you out’.
Step # 4: Understand The Law of the Land
Now that you have worked hard to build others’ trust in yourself and your team and be known to others and have selected the country you want to launch the ICO, the fourth step you must take is: understand the law of the land you are planning to launch your ICO in.
In several major economies of the world, crypto-coins and crypto-tokens are neither specifically legal nor illegal! So what do you do in such a dawn or dusk like visibility? The first place to start is to understand the existing laws related to Securities in a country where ICO is planned. In the U.S., for example, the Securities and Exchange Commission (SEC) has relied on the Howey test to determine whether cryptocurrencies may be treated as ‘securities’ and whether an exchange of cryptocurrencies may be termed as ‘investment’. The Howey test states that if a scheme:
- Involves an investment of money;
- Such an investment is made in a common enterprise;
- Such an investment is made with an expectation of profits to come solely from the effort of others.
then such a scheme, immaterial of whether the enterprise is speculative or non- speculative or whether there is a sale of a property with or without intrinsic value, would be an ‘investment contract’ and thus, within the purview of the U.S. federal securities laws.
In India, the Reserve Bank of India(RBI) has cautioned the public, users, holders, and traders of virtual currencies (cryptocurrencies) regarding the potential risks associated in dealing with such currencies and tokens. The RBI has also clarified that it has not given any license/authorization to any entity or company to operate such a scheme or deal with any virtual currencies.
Japan, on the other hand, is inching closer to legalizing initial coin offerings after a government-backed study group laid out a set of guidelines for the regulation and further adoption of the controversial crowdfunding method. In China, the People’s Bank of China, in early 2017, communicated that it would strictly punish initial coin offerings in the future and that those who had already raised money must provide refunds, though it didn’t specify how the money would be paid back to investors! There are reports that China might ease its rules on cryptocurrencies and ICO’s in the near future. But no one knows when for sure. These are only a few examples of legal stages in the evolving ICO story where some of the major countries are at.
Here is more on this: https://www.bitcoinmarketjournal.com/ico-regulations/
Step # 5: Get A Lawyer
You may have had a bad experience with or a poor opinion of the legal profession and lawyers, in general, however, once you have gotten through steps #1 to #4, now is the time to suspend all bad feelings about ‘legal-beagles’. Get a lawyer, who does not necessarily need to know about Blockchain or cryptocurrencies, but who knows about startup and company formation, securities laws, raising funds for a startup, tax laws and data related privacy laws. Remember, you may be a Blockchain guru with big brainwaves, but you are not a lawyer!
Step # 6: Have a Coin
Needless to say, there will be no Initial Coin Offering without a coin. So, create a coin which you can ‘exchange’ for real money or for other cryptocurrencies of value which could, in turn, be exchanged for real money (fiat currency). Currently, the Ethereum platform is a more popular platform to create coins for ICO’s. You might also choose to create your own crypto-coin or a crypto-token. To piggyback on more established platforms or to create your own coin will be one of the most key decisions on the path to ICO. If you think you can build a great ecosystem where your coin and the ecosystem you are going to build will generate a huge demand for your coin, you might choose to create your own crypto-coin. Otherwise, you might be better off to piggyback on others’ coins like Ethereum’s or Steem’s or any other. After you have made this crucial choice, you need to decide how you will offer your token via a convertible note, a voucher or a direct distribution.
Step # 7: Hit the Road, Man !
After steps #1 to #6 have been taken, it is time to ‘Hit the Road’ for a Roadshow. Collect all your collaterals on your startup: the markets to be addressed or new markets to be created; the share of the market to be obtained; the customer segments to be served; the technology plan; revenue and cash projection; a plan to be profitable; how you would avoid the four ‘death-traps’ (from your brainwaves bubbling down to the failure to scale) of a startup company and how the folks who
bought your crypto-coins will make a lot of money! Otherwise, why anyone should give you their money?
These are the seven major steps, the ‘ICO Saptapadi’, which need to be traversed on the road to an ICO. Count your Coins, Blockchain buddies and stay tuned.