Initial Coin Offerings (‘ICOs’), took off in 2017 as a means used by blockchain based startups to raise funding. A recent report by PwC’s consulting division Strategy& states that in 2017 alone a total of $4.6bn (USD) was raised through ICOs, up from $0.2bn USD in 2016. In October and November 2017 alone, five ICOs - totaling $494m - were among the top 15 token sales to date. The report provides a comprehensive overview of ICO activity globally, insight into emerging regulatory developments, and also looks at what the future holds for ICOs.
An ICO is a term describing a limited period in which a company sells a predefined number of digital tokens (crypto coins) to the public in exchange for major crypto-currencies (as of today, mostly Bitcoin and Ether).
ICOs are largely unregulated and, depending on their characteristics, although some jurisdictions are reacting either by seeking to find the right legislative approach, e.g. Switzerland, Hong Kong, Singapore, Mauritius; others are more concerned about all the implications and have intervened actively, such as the US and China. Since ICOs are by their nature decentralised, companies have tended to seek out the more favourable jurisdictions, driving activity in places like “Crypto Valley” in Switzerland and in Hong Kong and Singapore.
ICOs challenge the venture capital model, providing a third option for young companies to raise finance, after taking on debt or selling equity. Paul Mitchell, , says: “The ICO is the second big disruptive model to come from the blockchain after bitcoin, enabling decentralised fund raising, but there are not yet many clear regulations in this area. The best businesses are structuring their ICOs carefully to avoid regulatory and other pitfalls.”
The PwC report indicates that the best ICOs are looking to a ‘hybrid model’ that brings the best of VC and ICO funding. The benefits of having VCs on board to support the business are combined with the fundraising opportunity of the ICO, and also the ability to use the process to create a community around a project, in a similar way to traditional crowdfunding.
The report describes upcoming trends for those doing ICOs, emphasising governance, strong anti-money laundering, more of a focus on cybersecurity, and other structures to reassure regulators and investors. At the same time, the structure of the token sale itself is critical, and the way that tokens are priced and then the funds are released is a growing area of study.
In the future, PwC expects ICOs to have more of an institutional mindset and to work with top tier advisors and partners. Fund raising may become harder as investors choose to sit on the sidelines after recent issues and uncertainty, although stronger models may start to attract more institutional investors into this space. Finally, those involved with ICOs would do well to keep a close eye on evolving regulations and the impact on the process and governance related decisions.
Mitchell comments further: “With all the right pieces in place, ICOs can continue to be successful, and this is an exciting area to watch for 2018 and beyond”.
© 2010 - 2019 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.