Before you invest in an ICO you should have a detailed look at the financial structure of the ICO. After collecting this information you can start your assessment and decide if these work for you or not.
After an ICO has taken place there are a few additional financial values to look at, and of course you can use this information of ICOs that are already completed to help you analyze ICOs that are planned or active.
Although there are some special constructs around in general you can define the financial structure of an ICO as follows.
Total Coins Offered
The total number of coins offered for investors at the ICO.
Total Coins Reserved
This total number of coins that are reserved for the team, bounties, company and others.
Total Coins Available
The total number of coins that are available at the time of the ICO. This includes the coins that are reserved for the team, bounties, bonus, company and others.
The maximal amount that will be raised during the ICO. This can be expressed in any currency or number of coins.
The minimal amount that should be raised during the ICO. This can be expressed in any currency or number of coins.
Total Available Coins Capped
Indicates if the total coins that are available (Total Coins Available) are capped. In other words if new coins can be created during the ICO or not.
Accepted Payment Methods
Accepted payment methods of the ICO. I.e. BTC, ETH etc. This is relevant because you can use differences in currency values to buy in cheaper.
Percentage ICO Offered
The percentage of coins at the ICO that is for investors. This value is computed by dividing Total Coins Offered / Total Coins Available
Percentage ICO Reserved
The percentage of coins at the ICO that is not for investors and is reserved. This value is computed by dividing Total Coins Reserved / Total Coins Available
ICO Reserve Split
Describes how the Total Coins Reserved will be used. We split this in:
The start price of the coin/token at the ICO. This can be in any currency
Total Coins Post Sale
Indicates what happens with the amount of coins after the ICO.
2) Remains Unchanged
Post ICO following financial information is important to review.
Total Coins Placed
The total number of coins that were placed at the public after the ICO. In an ICO that reached its target the total coins placed are the same as the total coins offered.
A list with all the amounts and currencies that were raised during the ICO.
Funds Raised USD
The total amount that was raised during the ICO in USD. Exchange rates of the ICO end date are used. This Information can be used to compare the funds raised with other ICOs.
Average Price USD
The average price of a coin during the ICO. Depending on the bonus structure of the ICO many different buying prices are possible during the ICO. Computed as Funds Raised USD / (Total Coins Available * Percentage Offered)
The ICO Data Superset contains all these attributes and for each ICO depending on the status (planned, active, completed) you can use these values for analysis and due dilligence.
A token is just another term for a type of privately issued currency. Traditionally, sovereign governments issued currency and set its terms and governance; in essence directing how our economy works with money as the exchange medium for value. With the blockchain, we now have new types organizations (and soon, more of the existing type) who are issuing their own currency in the form of digital money as cryptocurrency, and they are setting their own terms and rules around its operations, in essence creating new self-sustainable mini-economies.
From a business point of view we can define a token as: A unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders.
Much attention has been on designing ICO’s to optimize the financial structure, i.e. the mechanics and specifics of token distribution, according to a given sale and ownership structure.
But thinking long term, the token usage relationships will be far more important than the design of its underlying ICO financial structure. There is no perfect token sale structure. You can precisely engineer an ICO and that will get you to launch it properly, but then you still need to deliver a viable business model for the long term. Unless, the business model is just to run away with the money from the ICO.
The key objective of the underlying project of an ICO should be value creation or production, and to make that happen, there needs to be a specific linkage between user actions and the resulting effects of those actions on the overall value to the organization.”
Usage without value linkage is a waste and will result in a failure backlash. A new project is like a startup. It requires a product/market fit, business model realization and a lot of users/customers.
The utility role of the token is a primary consideration in the success of the models that intend to exploit their powers. Tokens are multi-purpose instruments, and we are beginning to see more clarity in how they are being applied.
William Mougayar created an comprehensive categorization for the role, features and purpose of tokens. This can help you reviewing prospective and existing ICO-based companies.
Owning a token bestows a right that results in product usage, a governance action, a given contribution, voting, or plain access to the product or market. In some cases, tokens will grant real ownership, even if most organizations are trying to avoid passing the Howey Test by skirting around the ownership aspect. For examples, look at Numerai, DigixDAO, FirstBlood and Tezos.
The Value Exchange
The token is also an atomic unit of value exchange inside a particular market or app, resulting in the creation of a transactional economy between buyers and sellers. This consists of features that allow users to earn value and to spend it on services that are internal to the inherent ecosystem. They can earn it by doing active work (real work and actions), or passive work (e.g. sharing data). The creation of such an internal economy is arguably one of the most important outcomes, and one that must be sustained over time. For examples, look at Steemit, Kik, Tezos, and Augur.
Just like paying a toll to use a freeway, the token can be the pay-per-use rail for getting on the blockchain infrastructure or for using the product. This also ensures that users have skin in the game. It can include running smart contracts to perform a specific function, paying for a security deposit, or plain usage fees in the form of transaction fees or other metered metric. For examples, look at Gnosis, Augur, Melonport, Tezos, Dfinity, Ethereum, and Bitcoin.
The token can also be used as a lever to enrich the user experience, including basic actions like joining a network, or connecting with users. It can also be used as an incentive, if it is given in return to begin usage or for on-boarding. For examples, look at Dfinity, Steemit, Civic, and Brave.
The token is a very efficient payment method and transaction engine of choice. This is key for enabling frictionless transactions inside these closed environments. For the first time, companies can be their own payment processors without the cumbersome or costly aspects of traditional financial settlement options. Tokens offer a much lower barrier for processing end-to-end transactions inside a given market.
An equitable redistribution of the resulting increased value is part of what blockchain-based models can enable. Whether it is profit sharing, benefits sharing or other benefits (such as from inflation), sharing the upside with all the stakeholders is expected.
Assessing the Token Utility
When evaluating a given token-based organization, the more boxes that can be ticked pertaining to the role of the token, the better it would be. The role of tokens is like nails that encroach on your business model. You want more than a single one to hold it firmly in place, and keep it defensible and sustainable.
If the token usage is obscure, not well explained, or not defensible, there is weakness in that model.
Keep in mind that even if a company ticks the above list with a high score, they still need to execute on it. So, this list is more necessary than sufficient, for success.
I’m not sure that app coins vs. protocol coins are the right way to segment these tokens, but it is one way to segment, and one we use in our ICO Data Superset as well. Another way to segment the tokens is the following:
1. Coins or Cryptocurrencies
2. Utility Tokes
3. Securitized Tokens
The recent SEC announcement to consider ICOs as securities could actually be a good thing since it highlights the importance of Initial Coin Offerings (ICOs) as a new viable way to raise funds. It highlights the need for a new regulation. Whether these 3 types of tokens are securities remains unclear as their technical differences are blurry. That’s why a new regulation might be needed to let new innovations flourish.
Coins or Cryptocurrencies
These are digital currencies like Bitcoin in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds. They are operating independently of a central bank. Soon every fiat currency may become a cryptocurrency, in that case operating with central banks. This is what Singapore has started with their Ubin project.
The utility tokens are services or units of services that can be purchased. These tokens can be compared to API keys, used to access the service. They are a way to fund projects of shared infrastructure that couldn’t be funded before. To enable such ecosystems to be built some tokens can be “pre-mined” in addition to be sold in “crowd-sales” during tokens launches.
Tokens are representing shares of a business. In addition, considering the SEC announcement any token that can’t pass the Howey test should be considered as a security and fall under the 1934 Security Exchange Act.
The Howey test consists of the following:
1. Is it an investment of money or assets?
2. Is the investment of money or assets in a common enterprise?
3. Is there an expectation of profits from the investment?
4. Does any profit come from the efforts of a promoter or third party?
The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor’s control. If so, then the investment might be a security.
This is what brings confusion and in a way makes any utility token potentially a security since they can be traded on third party platforms. Utility tokens that a startup would issue to finance future customer’s purchases should not be securities, since their purpose is to facilitate the purchase.
An ICO, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for fiat, bitcoin and ether. It's somewhat similar to an Initial Public Offering ( IPO ) in which investors purchase shares of a company.
ICOs are a relatively new phenomenon but have quickly become a dominant topic of discussion within the blockchain community. Many view ICO projects as unregulated securities that allow founders to raise an unjustified amount of capital, while others argue it is an innovation in the traditional venture-funding model. The U.S. Securities and Exchange Commission (SEC) has recently reached a decision regarding the status of tokens issued in the infamous DAO ICO which has forced many projects and investors to re-examine the funding models of many ICOs. The most important criteria to consider is whether or not the token passes the Howey test .
The Howey Test
Under the Howey Test, a transaction is an investment contract if:
1) It is an investment of money
2) There is an expectation of profits from the investment
3) The investment of money is in a common enterprise
4) Any profit comes from the efforts of a promoter or third party
Although the Howey Test uses the term "money," later cases have expanded this to include investments of assets other than money. The term "common enterprise" isn't precisely defined, and courts have used different interpretations. Most federal courts define a common enterprise as one that is horizontal, meaning that investors pool their money or assets together to invest in a project. However, other courts use different definitions.
The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor's control. If so, then the investment might be a security. If, however, the investor's own actions largely dictate whether an investment will be profitable, then that investment is probably not a security.
If it does, it must be treated as a security and is subject to certain restrictions imposed by the SEC.
ICOs are easy to structure because of technologies like the ERC20 Token Standard , which abstracts a lot of the development process necessary to create a new cryptographic asset. Most ICOs work by having investors send funds (usually bitcoin or ether) to a smart contract that stores the funds and distributes an equivalent value in the new token at a later point in time.
There are few, if any, restrictions on who can participate in an ICO, assuming that the token is not, in fact, a security. And since you're taking money from a global pool of investors, the sums raised in ICOs can be astronomical. A fundamental issue with ICOs is the fact that most of them raise money pre-product. This makes the investment extremely speculative and risky. The counter argument is that this fundraising style is particularly useful (even necessary) in order to incentivize protocol development.
Before we get into a discussion over the merits of ICOs, it is important to have some historical context for how the trend started.
History of ICOs
Several projects used a crowdsale model to try and fund their development work in 2013. Ripple pre-mined 1 billion XRP tokens and sold them to willing investors in exchange for fiat currencies or bitcoin. Ethereum raised a little over $18 million in early 2014 - the largest ICO ever completed at that time.
The DAO was the first attempt at fundraising for a new token on Ethereum. It promised to create a decentralized organization that would fund other blockchain projects, but it was unique in that governance decisions would be made by the token holders themselves. While the DAO was successful in terms of raising money - over $150 million - an unknown attacker was able to drain millions from the organization because of technical vulnerabilities. The Ethereum Foundation decided the best course of action was to move forward with a hard fork, allowing them to claw back the stolen funds.
Although the first attempt to fund a token safely on the Ethereum platform failed, blockchain developers realized that using Ethereum to launch a token was still much easier than pursuing seed rounds through the usual venture capital model. Specifically, the ERC20 standard makes it easy for developers to create their own cryptographic tokens on the Ethereum blockchain.
Some argue that crowdfunding projects might be Ethereum's "killer application" given the sheer size and frequency of ICOs. Never before have pre-product startups been able to raise this much money and in this little time. Aragon raised around $25 million in just 15 minutes, Basic Attention Token raised $35 million in only 30 seconds, and Status.im raised $270 million in a few hours. With few regulations and such ease of use, this ICO climate has come under scrutiny from many in the community as well as various regulatory bodies around the world.
Are ICOs Legal?
The short answer is maybe. Legally, ICOs have existed in an extremely gray area because arguments can be made both for and against the fact that they're just new, unregulated financial assets. The SEC's recent decision, however, has since managed to clear up some of that gray area. In some cases, the token is simply a utility token, meaning it gives the owner access to a specific protocol or network; thus it may not be classified as a financial security. On the other hand, if the token is an equity token, meaning that it's only purpose is to appreciate in value, then it looks a lot more like a security.
While many individuals purchase tokens to access the underlying platform at some future point in time, it's difficult to refute the idea that most token purchases are for speculative investment purposes. This is easy to ascertain given the valuation figures for many projects that have yet to release a commercial product.
The SEC decision may have provided some clarity to the status of utility vs security tokens; however, there are still plenty of room for testing the boundaries of legalities. For now, and until further regulatory limits are imposed, entrepreneurs will continue to take advantage of this new phenomenon.