The market forces that drove the evolution of the private secondary markets - democratization, globalization, transparency and liquidity - are now driving the adoption of Initial Coin Offerings by private tech companies.
After the blizzard of ICO activity in 2017, few would contest that we are on the front end of a paradigm shift in the private capital markets. Accelerating declines in early stage VC activity while ICO volumes ramp are not a coincidence. And if the size of a paradigm shift can be predicted by the speed of its onset, then we should all be preparing for the venture world to change very significantly, very soon.
A major impediment to the use of ICOs as a financing mechanism had been the lack of regulatory certainty. This, however, was largely addressed in the United States by the SEC’s guidance in its July report regarding the DAO token. Singapore’s regulators soon issued similar guidelines and other jurisdictions are expected to follow suit. As a result, private tech companies now have a much clearer understanding of which tokens will be treated as securities and so require a regulated platform able to transact in unregistered securities (e.g., SharesPost). Conversely, it is also clearer which tokens will be treated as utility tokens and so can be traded on unregulated exchanges (e.g., Coinbase, Kraken, etc.). By pushing security tokens into the regulated world with its attendant investor protections, the SEC has ensured that they will be much more palatable to mainstream investors.
Case in point is the ground-breaking offering by Finom AG, a leading cryptocurrency mining, trading and ecommerce platform. Finom is the first to raise capital by selling its common stock in the form of a token maintained in a distributed ledger. By relying on SharesPost’s capability to conduct Reg. D, Section 506(c) compliant “crowd sales,” Finom was able to broadly market its security tokens in the United States. Though purchasers are limited to accredited investors, thousands were able to hear Finom’s story and were given the opportunity to invest online. After expiration of a lock up, Finom investors will be able to trade their tokens on the SharesPost Alternative Trading System.
From an issuer standpoint, the advantages to Finom over a traditional private placement of traditional equity securities explain why the future of venture financing is in tokens. While Finom still conducted an old-fashioned road show and made one-on-one investor pitches, its crowd-sale ICO also made its offering massively more scalable and efficient because it enabled both online marketing to tens of thousands of investors and an online investment process. And, from the investors’ standpoint, the secondary liquidity offered by tokens made the investment dramatically more appealing than traditional private company equity securities.
Much attention has been appropriately focused on the risks posed by ICOs to investors. We would note, however, that similar risks are present to some degree in any equity investment and believe that as the ICO market matures, these risks will lessen. As with most financial technology advancements, the early adopters are generally the nimble, risk-taking startups and entrepreneurs with few alternatives. Once the technology is proven though, established players bring greater compliance, governance, standards, transparency, etc., and the market becomes safer and more stable. The development of ICOs and distributed ledger (blockchain) technology will likely be no different.
In many ways, the current ICO story seems highly reminiscent of the early days of private market trading of Facebook shares. Initially there were equal measures of excitement and alarm, but ultimately that innovation was a key driver in the rise of the trillion dollar private growth asset class of unicorns we all accept as the “new normal” today. We expect the ICO market to follow the same trajectory. Fortunately, financial markets generally trend toward greater accessibility, transparency, efficiency, scale and liquidity. And ICO’s represent a material step forward in each of these respects. We expect they are here to stay and will become a key component of a better capital market for the innovation economy.
Greg Brogger is Founder and CEO of SharesPost.
This article does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.
Securities referenced in this article may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.
Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.
Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.
SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.
Copyright SharesPost, Inc. 2020. All rights reserved.