The ICO Craze Has A Predecessor That Silicon Valley Is Ignoring

Justin Gage is an analyst at Cornerstone Venture Partners and previously a data science major at NYU’s business school. You can follow him on Twitter here.

Initial coin offerings (ICOs) are all that tech can talk about today, it seems.

What’s an ICO? An ICO is when a company, usually blockchain-related, sells “tokens” (read: new cryptocurrencies or cryptoassets) that provide value to their product. Value can mean that the new token owners have governance rights, product use rights, or any slew of other things.

And ICOs are quickly picking up steam. Bancor, a company without a finished product, raised $150 million in 3 hours. That sum was outdone days later by’s $105 million raise, which took less time to complete than Banco’s 3 hour fundraising cycle.

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But the surface-level absurdity of a messaging company raising $275 million in hours highlights a cadre of problems ICOs have, and the tough questions that they’re forcing the tech community to answer.

Questions like: Is it irresponsible to raise so much money just because you can? How will naive investors be protected? What if this all crashes?

These questions will need to be answered before ICOs can become as mainstream as blockchain zealots say they will. Thankfully — but frequently forgotten — these problems have actually been dealt with before – five years ago to be exact.

Before ICOs Were Cool — The JOBS Act and the Equity Crowdfunding Craze

Passed in 2012 and implemented fully by mid-2016, Title III of the JOBS Act legalized equity crowdfunding for non-accredited investors. In English, Title III allows non-accredited investors, people without large new worths or super high incomes, to invest (limited) amounts into startups and receive equity in return. This was, and still is, a big deal.

Crowdfunding was already very popular prior to the JOBS Act. Kickstarter and Indiegogo became household names. But it was illegal to receive equity in return for your provided capital.

You either got a product in exchange, or you classified it as a donation. Title III was the first step on the path to changing that, and turning all of your friends into an armchair venture capitalist (hopefully not).

This new open door spurred a lot of interesting questions. If there’s anything I’ve learned from my time as a venture analyst, it’s that startup investing is very, very difficult. Success requires a diversified portfolio and, or, extreme luck.

That in mind, when it comes to equity crowdfunding: How are doctors and lawyers without any startup experience going to invest responsibly? How will founders maintain reporting and transparency to hundreds or thousands of investors? Aren’t we just opening the world’s wallet to scam artists?

Do these questions sound familiar?

ICOs and Equity Crowdfunding – Siblings?

They should, because they are the same questions being asked about ICOs. While we’ll discuss the key differences in a moment, ICOs and equity crowdfunding share the same fundamental premise: raising funds for a new company from the crowd instead of an elite group.

Both are meant to democratize the funding process, and to allow people without “proprietary access,” like venture capitalists, to be investors too.

And both face the same core problems that any open network does: trust, transparency, and accountability. Perhaps most importantly, both were and are heralded as “revolutions” that will displace existing systems and change the way we allocate capital.

The funny thing is, equity crowdfunding hasn’t really taken off to the degree that many expected.

It’s tough to estimate the numbers, but around $3 billion of equity crowdfunding was likely raised 2016, compared to around $70 billion venture dollars invested. All of these questions faded into the background as VC-backed startups took the lion’s share of success and media attention. Ironically, it’s taken a totally new format of funding (ICOs) that wasn’t even regulated in the first place to raise the same questions that worried us beforehand.

Distant Cousins

But for all the similarities that ICOs and Equity Crowdfunding share, there are a few key differences that should be noted. These disparities and the lens they offer can help explain why everyone is so much more excited about ICOs than they seem to be about equity crowdfunding.

The first and most important difference between ICOs and equity crowdfunding is that, well, ICOs have nothing to do with equity. Tokens are not the same thing as shares, and (generally) do not entitle you to the same things that shares do, like voting and reporting rights.

In fact, removing the need to raise equity and debt is one of the most interesting features of Blockchain-based companies. Tokens are all used differently depending on how the given company’s business model is designed. For example, crowdsourced hedge fund Numerai’s recently issued Numeraire token allows data scientists to stake the token on the success of their machine learning models. They get dollar based payouts for predicting the stock market effectively, and lose their tokens if their predictions are poor.

The second key difference is the reason why these ICOs are in the news – they’re not regulated at all! There are no mandatory reporting requirements, no limits on the amount allowed to be raised (hello,, and no regulations on what value tokens need to provide. Equity crowdfunding does have all of these requirements. It’s really the Wild West out there in ICO land.

One more contrast is community reaction to ICOs. Unlike equity crowdfunding, ICO’s have taken off like rockets. It’s partially unfair since equity crowdfunding sums are limited to $1M per year per company, but the scale that ICOs are seeing is unprecedented. Not only are the sums raised really large ($275 million), but they’re as oversubscribed as a YC company’s seed round.

The two largest ICOs were done in under 3 hours, and there were significant lines to get in. Institutional cryptocurrency investors have even created “sniper wallets” that automatically invest in ICOs before the average investor can. At this pace, ICOs really might catch up to venture funding before we know it.

So What Do We Have Here?

So are equity crowdfunding and ICOs similar? In some ways. They’re based on the same basic premise and share structural ties. But the kinds of freedoms and flexibilities that ICOs enjoy compared to equity crowdfunding are significant. It’s no surprise that we’re quick to point out the problems we might soon face with this new funding contraption.

These problems are going to take a while to sort themselves out. It’s likely we will see a few spectacular failures and successes before the market finds a comfortable middle ground. And it’s anybody’s guess how and when the regulatory bodies enter the equation. Until then, understanding that these questions have been asked before might do a bit to comfort the qualms.

In effect, the major difference between ICOs and equity crowdfunding is the same as what makes the whole cryptocurrency “revolution” unique – a focus on decentralization, empowering the common node, and ignoring anyone who tries to reel it in (including the government). ICOs do present the same problems as equity crowdfunding – but at a much larger and more extreme scale. And the cypherpunks wouldn’t have it any other way.

Correction: Article originally stated raised 275m based on reporting from The Merkel. We have since updated.

Illustration: Li-Anne Dias

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