News > Venture Capital

The Unregulated 'Initial Coin Offering' Market is Booming

By NexChange
Venture Capital

Young startups on the hunt for cash are increasingly turning to the world of cryptocurrencies, fueling the rise of “initial coin offerings,” the Wall Street Journal reports.

In fact, companies have raised about $1 billion through ICOs so far this year, according to the Journal, citing data from digital-currency research firm Smith & Crown. This is 10 times more than was raised through coin offerings in 2016.

While the big money in the IPO market usually goes to the hottest, most successful startups, this is not necessarily the case with coin offerings. The Journal notes that even obscure, unproven startups have been able to attract funding by going the cryptocurrency route, raising as much money as startups on average pull in when they undertake an IPO.

The coin offerings have opened up vast pools of capital, sometimes from venture-capital investors, to dozens of firms that likely wouldn’t be able to raise funding in traditional capital markets.

block.one raised $185 million worth of bitcoin and ether last weekend in its coin offering, according to Smith & Crown. Executives at block.one weren’t available to comment.

Dynamic Ledger’s Tezos topped that, raising about $212 million worth of bitcoin and ether between the weekend and Thursday.

The one big risk with the ICO market is that it is unregulated, which means there are no rules governing the transactions. The Journal compares coin offerings to crowdfunding campaigns (rather than a traditional securities offering), noting that the majority “don’t have a detailed prospectus, rather companies typically publish a so-called white paper outlining their project or idea.”

Buying into a coin offering is like purchasing a ticket to a Broadway show months or even years before a performance hits the stage. If the production is the next “Hamilton,” the ticket, or in this case the coin, could later be sold for multiples of its initial purchase price.

If the play isn’t produced, though, or if it turns out to be a flop, the ticket would be worthless. The same could prove true for some coin offerings.

Of course, as the Journal notes, with money starting to pour in from coin offerings, the U.S. Securities and Exchange Commission will no doubt begin to take notice.

Photo: Getty iStock

 

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