Token sales, also known as initial coin offerings (or ICOs), have exploded in popularity this year.
The frenzy seemed to have quieted for a moment after U.S. regulators came out and told crypto-enthusiasts that in order to play by the rules they have to treat tokens like the legal securities they are. But in the last months a string of celebrities have posted endorsements of different token sale projects. DJ Khaled posted on Instagram about Centra, the debit card and wallet powered by tokens. Paris Hilton tweeted about Lydian, a company developing ways to reduce ad fraud with blockchain technology.
In the same time period, the governments of China and South Korea have banned token sales over their concern for potential financial scams. But the speed and scale in token sale activity is surprising even to optimists.
"There are companies raising money in the low to mid eight figures that I've never even heard of," said Jonathan Mohan, founder of the Bitcoin NYC meetup.
Here's what you need to know about token sales -- essentially funding mechanisms for new companies in the form of crypto issuances -- today.
By the numbers:
How to stage a token sale:
- Total funding to date: $2.3 billion
- Value of largest token sale: $262 million (Filecoin)
- Token sales in the pipeline: At least 300
- New funding in a single month: $574.4 million in July 2017
- Countries that have banned ICOs: two — China and South Korea
- Celebrities promoting ICOs: four — DJ Khaled, Paris Hilton, Jamie Foxx, rapper The Game and Floyd Mayweather
Once the company’s project or idea or goal is introduced to the world it will eventually announce that it is staging a token sale. Take Civic, the identity startup selling its blockchain-based identity verification product. Earlier this year Civic announced its token sale, with posts by Civic itself and CEO Vinny Lingham outlining how many tokens it would sell, its terms and goals and told people why it was staging the sale. The company published a whitepaper on the landing page of its token sale website and gave people time to read, comment and assess the quality and value of the project on places like Reddit or Slack.
Participants, a lot of the time, are naturally crypto-enthusiasts who have always enjoyed very thorough online debating over political ideologies associated with different coins and systems and aren't any different during this ICO wave. On the same site, Civic directed people to a tool that would allow people to acquire the tokens, for their bitcoin or ether.
How token sales affect VC:
The token sale model effectively eliminates the need for venture capitalists and is even more appealing to investors because of how liquid the tokens are as assets. So far though, VCs seem unconcerned about the so-called threat of the token sale model. While some say the environment is too volatile or too much of a Wild West to be certain of anything, others are excited about the possibilities for tokens to innovate financial services. Incidentally, Civic also raised funds from VCs before it did its token sale.
The jury is still out on that one. In the U.S., the Securities and Exchange Commission ruled in July that ethereum tokens bought by investors in the DAO —the automated, leaderless ethereum-based funding vehicle
that suffered a massive hack last year after raising millions of dollars — should be treated as legal U.S. securities. That doesn't mean the end of token sales, but should slow down the ICO mania that's taken place this past year.
Where you can do this:
There are companies that come from many countries, but Singapore has some of the most token-friendly regulations — they don't consider tokens a security. Some token sales are structured in Switzerland as well as the state of Delaware, where many companies are incorporated and which is developing a system to let private companies issue and track shares of stock on a blockchain.
Who else is doing this:
Anyone can, although you’ll most likely see it come out of the blockchain community for some time because “crypto” scares people who work at regulated companies. Marco Santori, a partner at Cooley LLP, told Tearsheet in March that in two months, 60 percent of inbound interest in his lawyering services had been related to token sales. That’s probably increased since though; since the SEC ruling on DAO tokens, “anyone doing it right is doing it through Cooley and Perkins Coie,” Mohan said.