Initial coin offerings (ICOs) are changing the way startup companies enter the launch phase. These coins allow new companies to generate capital through direct sale and then bypass the venture capital stage of investment. Such token generation events function the same way as cryptocurrency coin generation and are generally based on Ethereum smart contracts. This manner of funding allows companies the freedom to develop without making sacrifices to provide early dividends. While there are regulatory issues to be solved, they offer investors an early and open way to engage with a promising company.
Types of Tokens
To understand the development of this new landscape, it is necessary to discern the different types of tokens and how they operate.
- Utility Tokens, also known as Access Tokens, are a wide class of fungible assets that are launched with a fixed supply. As such, there is the possibility of an increase in value over time, depending upon the particular token’s desirability. However, this classification is not a legal one, and at this time, there is token Securities Regulation(s) or SEC guidance.
- Security Tokens are backed by a representative asset, such as real estate or precious metals and can be traded for those physical assets.
- Equity Tokens are a type of security token. They function in the same way as traditional stocks. However, Equity Token Offering (ETO) make it easier for small time players to invest in promising new companies as they are not made available strictly through designated exchanges. Additionally, the company can avoid the costly Initial Public Offering process and go directly to the market.
But this does not mean it’s smooth sailing for these blockchain-backed tokens. One of the potential problems for investors is that the IPO process forces a company to be open about its finances and business planning. By going directly to token crowdsale, a company can hide some of its warts, meaning investors may not be aware of the true value of what they are purchasing. Investors may get caught up in token crowdsale exuberance and make poor, uninformed decisions.
It should be noted, though, that this can happen in all investment opportunities. It’s just exacerbated by a higher possibility of hidden information.
Token Security Regulation
Due to the rising popularity of token-generation events, ICO securities regulation is forthcoming. China has already blocked the process internally and lacking a U.S. federal position, individual states like Delaware, are stepping up to protect investors.
Still, as the market matures, one should expect Equity Tokens and Security Tokens to become a major part of the finance industry. The tokens themselves, as with all blockchain technologies, are inherently secure. And unlike Utility Tokens, they are representative of true, actual assets.