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CRYPTOMARKET

ICO Structuring

  • by Stephen Rowlison
  • July 5, 2017
  • 0
ICO Structuring

Most founders who create a token do so for a useful purpose. ICOs structure their raise with conditions in the form of a whitepaper. Commonly, founders construct their token to perform an automatic refund in the event that their target is not reached. In the event that the target is reached, tokens are released to the founders and investors, the purchased tokens can be freely traded on various crypto-currency exchanges. Founders use the capital raised to fund their projects and pocket from the upside if and when the token rises in value. Founders can sell their personally owned tokens at any time and cash in. Responsible founders take a salary and get paid on performance when they deliver.

What is concerning about the fund raising model is that the capital and the utility a token offers to a market place are both inextricably linked. A token gets its value based on asset value and future revenues. That might be ok, but surely there are several party roles to the deal. The investor who wants control of the company/project and the customer who wants control of the utility of the token, with management in the middle. The other party in the equation is the trader looking to speculate on the next best coin, who has no interest in the project. They buy for price alone and there are plenty of good ideas in ICO’s without source code, business plans or defined markets to pick from.

In the crypto-space founders seek to focus on the token rather than their company’s share capital structure. After all, issuing share/stock certificates is a dated and an expensive process. Tokens can be specified to employ all the rules of a typical security including voting and dividend payments, along with a public register of ownership and exchange. Regulators are yet to spot that tokens may look like a security, but are not a security since they do not possess the “characteristics” of traditional securities, it’s just fundraising. Listed tokens are far more liquid than paper stock. The rules of the founders’ local jurisdiction and company constitution bind them to regulation.

This is probably why very few tokens support characteristics of transitional securities such as voting and dividend payments, even though they can and are well suited for such functionalities.

For a regulator to deem a token a security is the single largest threat. Protections for investors and end users must be considered when structuring a fundraising campaign. Price is only one element, and trading on price to provide capital to exiting investors whilst not impacting end users is paramount to a successful business. For example, perhaps the company wants to make a special resolution concerning a token split or new issue. A single token which is linked to utility and capital would impact end users, they may need to purchase more tokens to get the same functional value. ICO’s should consider issuing two tokens, one for their fund-raising needs and another for the utility that their tokens offer their future users. In this way, new tokens for utility can be created without impacting share capital. The cost of providing the utility is deducted from the tokens sale price. The margin difference is returned to shareholders as a dividend payment from the capital token. Extracting value from the utility token should be in the hands of end users who did not sign up to be investors or speculators. Management should seek to preserve share capital value by ensuring that their utility tokens are efficient and not subjected to market speculation or the whims of founders. Potentially this approach may help reduce price volatility.

Photo credit © Shutterstock

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