ICOs, Initial Coin Offerings, used as the latest manner in which to fund startups is definitely a bit of a tricky trend to track – particularly from a legal perspective. For those not yet deeply entrenched in the space, finding true and complete information is somewhat like a scavenger hunt with certain players holding some keys, while others have different ones. There are few, real go-to’s precisely because the space is so very new and fragmented. But one thing is undeniable. It’s a space that shows no signs of slowing down anytime soon and already has upcoming new trends for which to watch.
Indeed, the ICO space is an arena where just a year ago, funding could be secured with little more than a white paper and that which only a handful of law firms sporting 500+ attorneys handled for fees up to $500,000 plus points. Fast forward just a few months and various factors are already beginning to rapidly change. In fact Jay Swob, an ICO attorney says, “In all my years of law, this is one of the fastest changing sectors I’ve ever seen. It changes each week, like a snake in the grass twisting and turning. There is simply no way to plan, but it’s very, very exciting.”
Swob, who is highly regarded in the ICO legal space given the number of deals he has worked on coupled with a love for cryptocurrency since childhood, an engineering background and a combination JD/MBA, says that part of the excitement is keeping up with and staying ahead of the fast-paced trends in the space. And one of the main areas of change in the ICO game is around legal fees. Smaller firms and individual attorneys have now entered the market offering very competent services that rival the space that legal behemoths once held exclusively. For example, the overall legal costs associated with creating an ICO if a company creates one on U.S. soil, which is, therefore, subject to U.S. Securities law, is approximately $100-$150k. However, an ICO conducted off-shore in, for example, the Cayman Islands which means no U.S. investor participation could cost as low as $50-75k. That means the possibility of using an ICO as a startup mechanism is now more accessible to more founders.
But wait, there’s more.
In just a little more than a year, the format has changed for investors, as well. “People were giddy from 100x and 1000x returns,” explains Swob. “Large amounts were raised just on a white paper. Now, investors are more concerned with due diligence. More and more they want to see a white paper, a presentation deck, sometimes even a minimum viable product (MVP). They also want to know the network, meaning the programmatic platform, the technical infrastructure that supports to ICO model. Everything is beginning to change simply because the business is starting to mature a bit.”
And this is not the only way in which investors are maturing. Swob says to watch now for new, secondary markets developing. Individuals who have made significant amounts of return in the crypto space are now either becoming “crypto angels” or even going as far as to start their own ICO crypto funds so that they can have more control in the startup investment game. “The next iteration of all this is the position of crypto portfolio manager,” he says. “Watch for more individuals to enter into this space, but it will not be for the faint of heart. This person will oversee any number of opportunities and investments many times on a 24-hour clock.”
But even if one has had enough sleep, the ICO area is a space where even the amount of time for the overall process is not completely firm. According to several in the industry the actually receiving investments could range anywhere from three months to over a year. “50 percent of this timeframe depends upon the personality of the founder and 50 percent upon the business model,” explains Swob. Thus a super Type-A Millennial founder could possibly create his or her own timeline. However, startups tied to, say, the healthcare space would not have such luxuries, as a result of HIPAA compliance demands and so very much more.
And naturally, if on-shore, securities issues affect the timeline. Swob cautions that companies need to be very careful if they are creating tokens purely for functional use around part of the business model or to actually raise funds. If it is the latter, then naturally the token is considered a security. Of course, if the ICO is conducted offshore, then the startup avoids all U.S. securities laws and income tax but then, of course, U.S. investors are excluded. But most don’t seem to mind.
Indeed, nearly two-thirds of those conducting ICOs are brand, new startups, currently. According to Swob, “The key is that they are created in reputable international financial centers such as the Cayman Islands, for example, where everything is highly vetted. Most traditional hedge funds are headquartered in the Cayman Island or Bermuda so there is a standard that is supportive.”
But what’s next in this creative trend in financing? Swob has a few predictions based on being so
entrenched in the space. “Watch for a hybrid SAFE with SAFT to become the new norm, at least for as long ‘normal’ is defined in cryptocurrency. This will provide companies with greater flexibility,” explains Swob. “The other hot area will be bifurcation. This will be for those who want the U.S. market. This will be about a dual token, meaning a security token, offered only to accredited investors (and with a 12-month lockup) and a simultaneous utility token to drive a fanbase.” Swob says that such an approach minimizes compliance issues and therefore, legal costs are reduced. However, this strategy will not be for every new company because decisions will hinge upon the current stage of the business.
One of the main trends to watch regarding ICOs, however, will be how this avenue impacts the angels and venture capital firms operating in the traditional fiat space. With talk of new models, new collaborations and hybrid partnerships between the crypto and fiat players, there could be some very interesting bedfellows on the horizon. Free from the stranglehold of out-dated pattern-matching standards and homogeneous gatekeepers, the startup community will be a fascinating one to behold that is more inclusive and rich on every front.