Six Years Since The First ICO And The Shift To STOs

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On July 31, 2013, J.R. Willett launched the first ever ICO, Mastercoin (now Omni), and tomorrow will mark 6 years since this monumental occasion. Looking at the last 6 years, it’s evident that the industry has matured and the very nature of fundraising within the blockchain space has changed. We’ve witnessed a slight shift away from ICOs: as evidenced in this STO report from the NEM Foundation, and the recent launch of STOs in public markets. In 2019, we’ve witnessed a further progression towards IEOs.


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In light of this milestone and the ever-changing fundraising landscape, we have included commentary below from leaders in the blockchain and crypto space. They have included their personal thoughts on the current status of the ICO/STO/IEO market, as well as predictions on the future of fundraising.

Dave Hodgson, Director and Co-founder at NEM Ventures, the venture capital and investments arm of the NEM blockchain ecosystem, commented: 

"Although ICOs worked well within a strong bull market, it became increasingly hard to raise capital as the market turned to a bear. Additionally, some high profile scam ICOs damaged sentiment and the overall attractiveness of this investment vehicle further. National regulators have also prosecuted several ICO projects for breach of securities regulations. As we have come through the bear market and the industry has matured, many companies are seeking to raise capital in a more compliant manner where regulation exists, or in a way that they think will be compliant within future regulation. Several successful issuances have now happened across various jurisdictions and the proposals are far more mature in their approach to presenting a viable investment opportunity.

The future of fundraising in the short-medium term is likely to focus on traditional startup avenues, including crowdfunding, angels, VC and private equity, coupled with the newer IEO and STO approaches. As we move into the era of Decentralised Finance (DeFi), I believe that a number of very interesting finance raising approaches will emerge and present themselves apart from the more traditional approaches. We've only really seen the tip of the creative iceberg at this point in time in relation to new fundraising models."

Pradeep Goel, CEO of Solve.Care, which aims to redefine care coordination, improve access to care, reduce benefit administration costs, and eliminate fraud and waste from healthcare and benefit administration around the world, commented:

“ICOs played a fundamental role in allowing blockchain projects to raise funds by making it easier for potential investors to invest. However, by the end of 2018, interest in ICOs started to wane due to exit scams and fraudulent token sales becoming more and more prevalent, and a lack of regulatory oversight.

Investors then began to pay more attention to STOs instead, because they appeared to be more transparent and secure. They also needed to comply with FINMA and SEC rules and guidelines. These requirements also mean that investments are restricted to institutional investors only, with KYC and investor accreditation now compulsory.

The past six months have sparked a renewed interest in blockchain projects. Inextricably linked to a specific exchange, IEOs bring an extra layer of security by eliminating the potential for illicit investments. With exchanges expected to carry out due diligence before the issuing of a token, and the expectation that participants will have to pass KYC and AML checks, there’s greater incentive for blockchain projects to engage in this kind of fundraising. The next five years will undoubtedly see the introduction of new investment models as the future of the tokenized economy evolves. As the industry looks to facilitate fundraising and address regulatory constraints, the model that ultimately offers the most transparency, security, and accessibility will prevail.”

Kevin Sekniqi, Co-Founder & Chief Protocol Architect at AVA Labs, whose mission is to build a payments rail and computation engine based on the breakthrough Avalanche family of consensus protocols, commented:

“The frenzy around ICOs in 2017/2018, and the more recent interest in their more regulatory compliant cousins known as STOs/IEOs indicates that the global public has a broader need for the wholesale democratization of responsible and safe fundraising. The next few years will witness a rise in more efficient fundraising processes that provide strong assurance and are increasingly more legally compliant.”

Lars Seier Christensen, Chairman of Concordium, the next-generation, decentralized world computer and the first with ID-verification built-in at the protocol level, commented:

"There is still too much focus on form over content in this market, and because so many ICOs were successful with fundraising but unsuccessful in executing their business plans, retail interest petered out. While the shift to STOs marked a shift to higher quality projects, investors are much more selective now. This new form of fundraising is not a panacea for the underlying lack of project quality, and there are many lessons that still have to be learned in this relatively immature industry.

I am sure new models will continue to spring up, but the long-term success of these projects will also determine the long-term appetite for investing in the space. Clearly, with bitcoin's volatile recovery, some risk appetite is returning, but there is still a distinct lack of real institutional interest in investing. Investors are awaiting better regulatory clarity and evidence that projects are successful with their business models, not just with fundraising. If there is no real viability or way to profitability for most projects, fundraising will remain patchy."

Sky Geo, Founder & CEO of Cypherium, the enterprise-focused blockchain platform that prioritizes scalability and decentralization, commented: 

Like the DLT space on the whole, dynamism of crypto fundraising has good and bad aspects. Partly, the space has shifted so quickly because it innovates at such a fast clip, like the tech itself, always changing and looking to improve. Unfortunately, there is another reason for the constantly shifting standard fundraising apparatuses: new projects looking to make a quick buck while evading the improving regulations. And because of that, the community has no choice but to convene around a single, cogent standard of early investment. This certainly does necessitate conforming to the laws of traditional startup equity, which open themselves only to the uber-rich. Instead, crypto projects will have  to develop a stable, internal fundraising logic, one that can be understood international and withstand the test of time.”

Christophe de Courson, CEO of Olymp Capital, Europe’s first asset management fund dedicated to blockchain and crypto, said:  

“The beginning of ICOs in the crypto space marked an important milestone, as blockchain became a new tool for businesses to raise funds in a more accessible way than ever before. ICOs unlocked the ability to raise capital, which was previously reserved for companies with the resources to hold Initial Public Offerings. Accessible fundraising is central to the financial inclusivity that underpins the entire decentralized financial sphere. 

That being said, it is also important to note that the crypto industry has matured a great deal since the earliest ICOs. This phase of maturation was largely caused by the bear market, which helped to filter out weaker projects and scams. The crypto ecosystem has grown into a more credible and legitimate space, where real business is taking priority. 

The bear market was also followed by a decline in the numbers of ICOs. Meanwhile we have witnessed emergence of Initial Exchange Offering (IEO), giving more security for investors as the exchange platforms are selective; time will tell if IEOs are just an opportunistic trend or a long term model. In addition, we have seen the first Security Token Offerings (STOs). STOs are seen as the next big event for blockchain and finance, but still need adequate infrastructure, promotion, and regulation in order to deliver on its promises. In the years to come, I anticipate that the industry will continue to mature, driven by enterprise adoption and institutional investment which has already taken flight.”

Charles Lu, CEO of Findora, a cryptographically transparent public blockchain for building financial applications, commented:

 “Six years ago, the ICO emerged as an innovative and subversive way to raise funding for the new phenomenon of decentralized networks. ICOs offered a way to jumpstart development of a public shared resource and initialize a diverse global pool of stakeholders. ICOs were also dramatically different from traditional funding methods, which are often associated with high costs, siloed investor pools, illiquidity, and financial exclusion.

Though fruitful systems like Ethereum were bootstrapped by ICOs, as the ICO craze took off, some of their shortcomings were clear. ICOs were often structured in ways where the incentives of teams and investors were misaligned. The lack of accountability and high degree of speculation led to a large number of 2017 and 2018 ICO projects failing and disappearing. Additionally, many ICOs were found to be likely in violation of local securities laws.

Recently, we have seen the decentralized funding model evolve further. Regulation around blockchain is steadily gaining clarity around the world, and innovations like security token offerings (STOs) are emerging. Because many traditional financial services are inefficient, expensive, and inaccessible, we predict that finance will continue to improve through democratization, interoperability, and automated compliance. Though the rampant speculation of 2017 led to many failings, ICOs have a very important place in the history of financial democracy, and financial services will continue to evolve in the direction of transparency, accessibility, and compliance.”

Charles Phan, Founding Engineer of Interdax, the all-in-one cryptocurrency exchange providing a safe, secure, and more efficient platform to the masses through innovative derivatives contracts, commented:

"It's only natural for projects to move away from ICOs towards IEOs, as the early landscape saw a failure in terms of due diligence, causing many vaporware projects to be funded. With an IEO platform, investors are assured of two critical aspects: there is an immediate and liquid market for the new token, and there is an experienced team who will ensure that only legitimate projects are listed. As the market matures, it will become clear that exchanges are the natural place for offerings to congregate, in particular, with exchanges that are able to offer a full range of products for new tokens."

Jose Llisterri, Co-Founder of Interdax added: 

“After the wild west that the on-chain ICOs were, it is normal that token sales have gravitated towards more controlled and centralised offerings like IEOs or STOs. These new formulas are in high demand because traders and crypto enthusiasts love that exchanges are saving them hours of research and due diligence. This trend will continue during the coming years as regulators catch up and proper frameworks are applied to both sales of security and non-security tokens.”

Florian Glatz, Co-Founder of Fundament Group, commented:

“Since the first ICO in 2013, the blockchain industry has undergone a significant transformation. The initial wave of ICO-based crowdfunding served to fuel the protocol wars, that is, the competition for the best base-layer protocols. However, ICOs soon lost their attraction since they focused primarily on the application layer, for which the funding model proved to be the wrong instrument. Today, we’re witnessing the onset of a new type of competition - the wallet wars - where companies such as Facebook compete for end-user relationships. At the same time, smart entrepreneurs have adopted the lessons learned from the ICO-craziness of previous years and applied them to regulated financial instruments such as bonds. By combining the concepts of shared digital ledgers and tokens with traditional investments, financial inclusion can finally reach a new, global scale. In the next five years, we will see tokenization become the new standard for securitizing debt and, ultimately, equity. In terms of distribution, the latest fad of IEOs is just a signifier of consolidation in the market around aggregators of end-user relationships. In that sense, the wallet wars and STOs go hand in hand.”

Aries Wang, CEO and Co-Founder of Bibox, the AI enhanced crypto digital asset exchange, commented: 

“The shift away from ICOs is a response to the ‘Wild West’ nature of the ICO  craze — unregulated, decentralized and statistically speaking, risky. Fundraising has gone unchecked from regulators, and resulted in huge portions of investors losing money. A fundamental issue with ICOs is the fact that most of them raised money pre-product, without regulated exchanges to support their endeavour. Customers were left burned by scam projects which had poor business models and raised funds through illegitimate websites. Similarly, genuine businesses suffered as a result of the tarnished reputation left by the bad actors. The ICO boom was important in developing a novel form of crowdfunding, but made investment extremely speculative and risky. Enter the IEO. The IEO fundraising method is making waves in a big way — May 2019 saw 45% of all fundraising by blockchain and crypto projects conducted via the IEO model, whereas ICOs only accounted for 4% of all funding. Blockchain entrepreneurs are realizing that to succeed long-term, they need the legitimacy of trusted networks — cleared pools of investors, sponsors, marketing experts and guidance from teams of financial experts who have raised funds in the past. In order for blockchain to mature as a genuine mainstream space for investors, these networks will need to be utilized, adding legitimacy to the space.”

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