The upsurge of the Initial Coin Offering (ICO) model witnessed in late 2017 and early 2018 has since dwindled, and prospective investors today are seemingly less attracted to the idea of partaking in an ICO project. A number of factors have actively contributed towards this deterioration some of which are:
- The lack of an underlying product being interlinked to the utility token itself and thus, having an impractical token for which there is no demand in the market.
- Unrealistic valuations of the proposed project and lack of Tokenomics implemented in the token design stage leading the majority of ICOs to unsuccessfully reach the Soft-Cap and raise the funds required.
- Numerous high-profile scams and fraudulent schemes making this feasible crowdfunding method almost redundant.
Consequently, this resulted in an interesting market shift, leaning towards Security Token Offerings (STOs) which essentially is an Initial Token Offering (ITO) whereby companies will be able to raise funds. A security token is fundamentally an investment similar to the traditional financial instruments which are electronically issued on a Blockchain platform and accordingly, an investor may hold a stake in the company through the acquisition of tokens. STOs are perceived as a better transparent investment vehicle since regulators are involved in the process once a public offering is made, leading to protection of the both the investors and Blockchain industry itself.
In light of the above, we are proposing the following model to companies who are interested in entering the Blockchain sphere and benefitting from what this innovative technology has to offer.
An STO may be launched at the very initial stages of a company's inception and presents an attractive alternative to traditional capital raising methods. Through a private STO, issuers are simply required to enter into a contractual arrangement with their investors, without triggering a licensable activity supervised by the Malta Financial Services Authority (MFSA). A company at seed stage would be able to raise the required amount in order to commence production of a prototype and introduce it to the market. In this respect, potential stakeholders together with consumers will be able to have a visual concept as management puts pen to paper and will prospectively lead to more perceived confidence in the company.
Concurrently, a corporate entity will also issue utility tokens which will be linked to the goods or services offered and rendered by the same. In this respect the benefits of a utility token are reaped as a company is valued purely on the deliverables rather than the company as a whole including its governance and budgets. This is because the demand of the product or service offered is directly linked, all other factors being equal, to the demand and presumably price of the utility token. Consequently, there will be no leakage being imposed on the company's valuation. The utility tokens however, will not be offered through an ICO but will be available to the public once they are duly listed on a Distributed Ledger Technology (DLT) exchange. In this respect, in view of the early stages of the project and the limited operating history of a company, investors would be more inclined towards the idea of receiving utility tokens offered through a high level of protection from a regulatory perspective once it is made public through the DLT exchange.
Through the funds raised pursuant to a private STO, a corporate entity is expected to be better positioned for the undertaking of any particular proposed project through product development and market introduction. Subsequently, given that the utility tokens are intrinsically linked to the demand for goods or services offered and rendered by the company launching an STO, the value of such tokens shall potentially increase at the same gradual pace, all other factors being equal as tokens are utilised and redeemed.
Upon acquiring security tokens, investors shall be given the option to either:
1. Convert the security tokens into a pre-agreed number of utility tokens at any time after the listing date, that is the date on which utility tokens are listed on a DLT exchange; or
2. In the event where the value of token be equal to or more than the predetermined target price as set on the date of acquisition up until the trigger date, which is a prearranged date set upon signing of private placement document, the investor will automatically get the security tokens exchanged to the previously set number of utility tokens. On the other hand, should the pre-set value of tokens not be met, the investor will have an option to take up the pre-agreed valuation for an equity option. A 3-month average period between the date of acquisition and listing date is deemed as appropriate in order to avoid the possibility of market manipulation linked with the utility token value.
This proposition has the potential to thwart the current adversities associated with ICOs and utility tokens, by safeguarding a stakeholder from the risks rooted in the volatility of a company's utility tokens. Thus, in the event said tokens fail to render the expected return on investment, a stakeholder shall be offered the option of equity holding which would normally grant a share in ownership and right to dividends to a stakeholder. Additionally, this proposal is bound to instil further confidence in an issuing company to offer equity holding, as the prospects of generating further income is intensified pursuant to the nexus between the good and service offered by the issuer and the utility tokens.
One needs to keep in mind that an investor seeking to acquire utility tokens, need only to believe in the product carpe diem as opposed to security tokens whereby, company governance, expenditure and overheads will need to be taken into consideration when valuing the aforementioned.
Despite the downfall in ICOs, the enthusiasm for Blockchain still holds to date. Having said this, key players in the industry have acknowledged the fact that investors require a more reliable and sustainable approach. Companies are thus encouraged to offer propositions which will increase investor's confidence both in the proposed project itself and the Blockchain ecosystem.
Corene Ellul, Account and Tokenomics Associate at E&S Group
E&S Group is a boutique, multidisciplinary corporate advisory practice that provides a wide array of services to an international client base, from the simple setting up of a business operation to the more complex related issues. As a multidisciplinary group our pro-active team of practitioners, financial advisors, accountants and corporate administrators are available to assist, advise and deliver to any aspects of our clients' operations. Contact E&S Group on +356 20103020 or via email at [email protected].