ICO’s, IEO’s, and even STO’s have failed to live up to their promised hype as it became difficult for blockchain companies to raise capital through them. However, some companies have found success in the token sale model. What’s Next for Crypto Fundraising?
The cryptocurrency frenzy of 2016, followed by the market-wide rally in 2017, brought Initial Coin Offerings (ICO’s) to the limelight. However, a study published in 2018 concluded that 80 percent of ICO’s completed during these two years were either fraudulent or a scam, costing investors billions of dollars cumulatively. While many believed that ICO’s would usher in a new era of fundraising and even eventually replace Initial Public Offerings (IPO’s) in the long term, this never ended up happening.
The disillusionment with ICO’s later paved the way for Initial Exchange Offerings (IEO’s) and Security Token Offerings (STO’s). However, they too have failed to live up to their promised hype as investors and regulators began scrutinizing companies more closely than ever before. Laws introduced by global regulators, including the United States Securities and Exchange Commission (SEC), have made it difficult for blockchain companies to raise capital through ICO’s, IEO’s, and even STO’s. Having said that, companies with strong product offerings have found some success in the token sale model.
Start of the Bitcoin Frenzy – Crypto Fundraising
Bitcoin entered 2017 on the back of a slow and consistent price rise in 2016. At the time, most other digital currencies held a close price correlation with Bitcoin. The asset class’ main user base consisted of technology enthusiasts and libertarians who believed in the vision of a decentralized currency.
According to data from Coinmarketcap, the world’s oldest digital currency rallied from $963 on January 01, 2017 to its all-time high of $20,089, by December 17, 2017. Bitcoin, along with hundreds of other digital tokens, rallied alongside buoyant investor sentiment during that time frame.
The sharp rise in interest was observed for other major digital currencies such as Ethereum as well. At its highest, the cumulative market capitalization of the crypto market swelled to a staggering $814 billion. After a sharp correction in 2018, however, the market’s valuation currently stands at $149 billion.
How ICO’s Fuelled the 2017 Crypto Rally
The crypto market’s rising popularity amongst retail investors offered entrepreneurs new fundraising options for their up and coming crypto and blockchain businesses. Ethereum, the second most popular currency today after Bitcoin, is the result of a public token sale held in 2014. Since then, the Ethereum platform has become a hotbed for new decentralized applications, smart contracts and unique spin offs, such as Decentralized Finance (DeFi). Most tokens issued during the 2017 ICO boom were ERC 20-based tokens, built on top of the native Ethereum blockchain.
ICO’s presented a simpler and easier route for raising capital, all without regulatory scrutiny. In a bull market, capital is easily available and the crypto rally of 2017 provided fertile ground for ICO’s to grow. According to statistics by ICO Bench, more than 5,700 projects raised a combined $27 billion through ICO’s. Ethereum, NXT, IOTA, and EOS hold the record for being some of the biggest and most successful ICO’s. Investors received outstanding returns on their original investment, while the founding team were able to use the capital to deliver a world class product. As with every form of investment, however, risks were plentiful.
IEO’s and STO’s Come to the Limelight
While ICO’s in the past have found some success by employing aggressive marketing techniques to lure investors without having any solid plans for their product, this unsustainable business plan forces them to eventually shut down. The SEC, which has been closely watching the crypto market, halted an alleged unregistered digital token offering of $1.7 billion. Through a string of measures and notices, the SEC shut down fraudulent ICO’s, penalized companies and returned investors’ money.
In light of this, two new fundraising models, namely Initial Exchange Offerings (IEO’s) and Security Token Offerings (STO’s), popped up. In an IEO, a digital currency exchange agrees to sell tokens to investors directly in exchange for a small fee. On January 14, 2020, the SEC issued a new alert warning investors to exercise caution before investing in IEO’s. The regulator reiterated that due to the nature of tokens being offered, they may be classified as securities and would require registration under federal securities laws. That being said, crypto projects that chose to sell utility tokens through IEO’s were not subject to the same treatment.
Security Token Offerings (STO’s) are token offerings that voluntarily comply with securities laws and are registered with the national securities regulator. In the US, such token sales are only approved by the SEC after a thorough review of the project and its founding team is conducted. This is the only fundraising option for companies looking to acquire capital from American investors. However, obtaining approval for a STO can be difficult and time consuming.
Nevertheless, there have been plenty of successful security token sales. Blockstack is the most notable case of an SEC-approved Security Token Offering. The company received Section D approval in 2017 to offer tokens to accredited investors. In July 2019, it became the first SEC qualified token offering in American history, with a $28 million offering to the general public.
Surviving in a Crowded Investment Landscape
There is now cutthroat competition in the crypto market, with hundreds of projects entering the market. Statistics shows that the total amount raised by all crypto projects dropped to $0 in two seperate weeks in October and November of 2019. Anton Dziatkovskii, co-founder of Platinum Software Development Company, said:
“The era of easy funding for crypto projects is over. People have become aware and will only back projects that have a solid vision or have a talented team with a robust plan”.
He added that the recent COVID-19 crisis could provide an excellent opportunity to see which projects have the resilience to withstand these challenging times.
Most new crypto projects have vision and a fundraising plan but lack the team, supervision or expertise required to execute their ideas. To alleviate this problem, Platinum Software Development Company aims to provide end-to-end solutions for crypto and blockchain projects, as well as to assist startup entrepreneurs during the crucial planning stage. According to fellow co-founder, Dan Khomenko:
“The vast majority of blockchain startups enter the fundraising stage without a proper roadmap or MVP, which negatively impacts their image. A strong demo or product showcase that delivers on some of the platform’s promises can go a long way towards demonstrating potential and trustworthiness”.
Platinum Software Development Company, which serves as a leading blockchain development and consulting company in more than 19 countries, has decided to pivot to full-cycle software development. Spotting an opportunity in the emerging blockchain industry, the company now offers enterprise applications and omni-channel digital platforms, mobile development, cloud, DevOps, test automation and many other services.
The pivot will help Platinum service new clients in the financial, information service, healthcare, and other industries. Khomenko said:
“The pivot will help us enter new markets, service new clients and grow our customer base without compromising our blockchain consulting and development business. We can also provide blockchain solutions to our new clients and create a deep and meaningful impact for the industry”.
Platinum Software Development Company’s expertise and support comes at a time when institutional interest in the crypto industry is at a peak. While retail investor enthusiasm has somewhat dwindled, institutions are now raising fresh funds from limited partners for investment in the sector. According to a report published by PwC, there are 150 active crypto hedge funds managing more than $1 billion cumulatively.
Only the Strongest Will Survive – What’s Next for Crypto Fundraising?
The flames of IEO’s and STO’s are still swaying in the cryptocurrency market, but their lights are weakening. In today’s environment, investors are no longer ready to trust their assets to ideas without ground; they are interested in close-knit teams and real development results. Being new to the crypto market in 2020 is a suicide, natural selection has left only the strongest after the crypto winter. These companies are able to develop products and will not give their share to anyone. They have been here before and they will lead the market into the future.
What’s Next for Crypto Fundraising?