Minimal launching costs and the ability to solicit crowdfunding from virtually anyone in the world with ease have been identified as the main reasons why startups are embracing the Initial Coin Offering (ICO) model as a fundraising method.
Whether one represents an established organization or a group of college graduates with an innovative idea and little start-up capital, ICOs offer a level the playing field.
ICOs are currently preferred to traditional methods
President and Host at Blockchain TV, Jason Cassidy, explains that promising projects are taking the ICO route over the traditional venture capital path because of the low barriers to entry.
Cassidy notes that the rules of engagement for ICOs are often set by the project team, giving them considerably more control. This is the opposite of the venture capital space, where the investor usually dictates the flow of negotiations.
He elaborates, saying another important factor in the ICO boom is the relatively low cost to launch a successful crowdsale. ICOs are also raise capital much more quickly than the traditional funding routes, making it clear why projects often prefer Initial Coin Offerings.
More ICO regulation is imminent
However, Cassidy notes that as the industry grows, the level of difficulty for carrying out ICOs will increase due to imminent regulations by governments and institutions.
“Regulations are being put in place across the globe currently to bring a level of transparency and protection to the ICO model. As time goes on, more and more countries will bring forth regulations and the barriers of entry will increase, as will the quality of the ICO offerings that abide by the rules of those jurisdictions. Locales such as Zurich and Singapore are likely to become havens for ICOs given their friendly stance towards not only the crowdfunding model but the underlying technology itself.”
Earlier this month, the Chinese government announced a ban on companies that were carrying out ICOs within its borders, ordering them to refund investors who contributed to such projects.
This action by the Chinese government had a significant impact on the cryptocurrency market as the prices of token dropped sharply and many companies had to adjust their plans and programs.
Even though the event came as a surprise to many in the industry, China-based Partner at Cryptocrest Dana Coe tells Cointelegraph that the development was nothing out of the ordinary:
"To anyone who is familiar with Chinese law, this move to ban fundraising via ICOs comes as no surprise at all. China has long frowned upon "fund raising" activities within it's borders. I've consulted for several successful ICOs over the past months, and when they asked about bringing their ICOs to China, my advice was, ‘Forget it. They will land on you like a ton of bricks if you are perceived as doing free-lance fundraising in PRC.”
He tells Cointelegraph that in China, events such as ICOs are illegal and the penalties are harsh.
China effect is good for the industry
According to Coe, the Chinese government has actually taken a rather soft touch in allowing these ICOs to just refund their customers and walk away. He notes that the fallout from China may be perceived as a setback, but given the possibility of shady ICOs harming the interests of consumers, and the reputation of cryptocurrencies as a whole, it is good to clean up the space. Coe elaborates:
“I expect some sort of registration framework may be proposed for future ICO-like offerings. This way at the very least a responsible party is known to the regulators. People want to participate in ICOs, they can still do so, it is just they will have to be more circumspect about it by using only crypto.”