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According to Tokendata, there were 902 token sales in 2017 which raised a total of more than $2 billion. Unfortunately, 142 projects did not survive and many more ICO startups failed either due to the founders taking the money and running, or by slowly ending any activity. As a result, 46% of last year’s ICOs were dead by early 2018. However, the ICO market is still hot — more than $1 billion has been raised since January 1 of this year.
Despite the fact that many ICOs failed, more than 54% were successes and dozens of ICOs and altcoins provided a return on investment of more than 500%. In terms of the failed ICOs, many suffered from poor ideas from the beginning, but unreliable irrational exuberance seemed to be the reason why many invested in ICOs with zero business plans. As a result, ICO investing became somewhat tarnished as an investment option.
However, the overall ICO performance deserves a closer look.
Over time it has become harder for new blockchain-based startups to reach their soft cap. The widely used ICO model of utility tokens which can only be utilized to buy goods or services from the company issuing the utility token, could be one of the main reasons.
A much better ICO model is the security token, an equity-based token share, which represents ownership in the ICO company. In a few cases, these security tokens actually pay dividends.
The great fiction of utility tokens
For now, there are only a few ICO funding models out there: a) utility tokens, b) security tokens, and, c) payment or store-of-value tokens. The most widespread ICO fundraising technique is to issue utility tokens. These are defined as a tool “to represent future access to a company’s product or service”. The defining characteristic of utility tokens is that they are not designed as investments and if they are properly structured, this feature exempts utility tokens from federal laws governing securities.
The opportunity to be exempt from federal laws governing securities is the main feature here. Blockchain startups basically want to come up with a mechanism which they hope will protect them against actions by the SEC. That’s why they call their coins “utility tokens” and claim that these assets are not investments and can only be used for payments for the company’s product or service.
However, almost always the total token supply is fixed and white papers are written in a way that every reader understands — the token price will increase over time because the project should be so successful, and the number of issued tokens is so small, that theses utility tokens will cost more and more. There are no direct mentions of this speculative potential, of course. They are then able to say, “Don’t worry, we’re not selling securities, these are only utility tokens.”
Not much of an investment and their claims are not quite true.
Tokens should be securities
There are currently only a few ICO projects whose teams are honest enough to call things by their real names. It is not hard to understand why. In a utility token model, ICOs can just accept investors’ money and offer nothing in return, apart from the often vague hints about the future speculative income from the rising token price. Most often there is no need for a utility token in the project, but the team members just want to grab as much money as possible, up front, with no promise of giving equity or dividends.
One of the new ICO projects which IS using the correct terminology is PinkDate — the first blockchain-based, Tinder-like global escorting platform. Escorting is a $157 billion-dollar industry worldwide, currently without a national or international leader. The PinkDate platform is an all-in-one productivity and management web app for escorts to help them cut out the middlemen in this 3000-year old industry, via new technology. As in many other blockchain startups PinkDate is offering an ICO. However, the big difference with this ICO, is that in exchange investors receive token shares representing equity in the company; they do not get a useless utility token. In fact, these PinkDate PDP token shares behave the same as an investment in many public companies.
The PinkDate token shares have the same as characteristics as publicly-traded securities. That is, token shareholders represent equity and pay dividends every three months. Dividends are not arbitrary but paid out of 50% of the company profits. Moreover, these tokens are expected to be traded not only on decentralized exchanges, but also on traditional exchanges such as LiveCoin. There is a thorough financial plan presented in the PinkDate project white paper.
It appears likely that regulators all over the world will eventually acknowledge utility tokens as securities. This is a reality which is much better to address up front.
New ICO projects such as PinkDate and a few others such as tZERO, KODACKOne and Polymath also represent this new trend of being honest, and are not trying to pretend to be something that they are not.
There is no doubt that the use of ICO funding will continue as a popular fundraising tool and some predict it will surpass the level of VC funding.