V. New Fundraising Models
*“A major reason attributed to the success of fundraising through token offerings is the liquidity provided through the reduced trading friction enabled through the blockchain.” *— Jonathan Chester, Founder & President of Bitwage169
Nakamoto launched Bitcoin without raising funds.170 Other proposed blockchain projects, however, sought to raise funds using new financing mechanisms such as Initial Coin Offerings (ICOs), Security Token Offerings (STOs), and Initial Exchange Offerings (IEOs).171
165. See Rachel Wolfson, Understanding How IBM and Others Use Blockchain Technology to Track Global Food Supply Chain, FORBES (Jul. 11, 2018), [https://perma.cc/GB3B-KYVJ] (discussing IBM Food Trust’s use of blockchain technology to track dozens of food items, such as vegetables and fish, to help retailers identify contamination).
166. LACITY ET AL., supra note 84, at 41.
167. Xbox Game Publishers Access Royalties Statements Even Faster Now That Microsoft Uses Azure Blockchain Service, MICROSOFT (May 2, 2019), [https://perma.cc/W7HL-YTH6].
168. See LACITY ET AL., supra note 84, at 13 (comparing organizational mission statements regarding business benefits of blockchain).
169. Jonathan Chester, How to Run A Successful Security Token Offering in Compliance with New SEC Guidance, FORBES (Apr. 15, 2019), [https://perma.cc/7E4VK5AJ].
170. See Nathaniel Popper, What Is Bitcoin, and How Does It Work?, N.Y. TIMES (Oct. 1, 2017), [https://perma.cc/53DT-ZS5Y] (claiming Nakamoto created rules for Bitcoin and simply released the software to the world).
171. Michael Mendelson, From Initial Coin Offerings to Security Tokens: A U.S. Federal Securities Law Analysis, 22 STAN. TECH. L. REV. 52, 61, 63 (2019); What Is a Security Token Offering (STO)?, CRYPTONEWS, [https://perma.cc/7KLE-J4G2] (last visited Feb. 28, 2020); Gertrude Chavez-Dreyfuss, Explainer: Initial Exchange Offerings Flourish in Crypto Market, REUTERS (June 20, 2019), [https://perma.cc/F5WC-EDLP].
A. Initial Coin Offerings
With an ICO, people exchange money (typically bitcoins) for new coins released by the project’s founders.172 Mastercoin was the first ICO, which raised $5.5 million in 2014.173 Ethereum was the second ICO, raising $16 million in 2014.174 With an ICO, projects raise cash by launching a new coin or token, i.e., a new cryptocurrency.175 Investors buy the coins (but not shares in a company)—which bypassed many onerous regulations until regulators like the SEC finally investigated their legality.176 ICOs raised about $14 billion dollars from 2014 to 2018.177 However, when regulators around the world started intervening, the market fell precipitously.178 In 2018, ICOs raised $7.8 billion worldwide compared to $370 million in 2019.179 While ICOs fell in popularity, two new funding models rose in popularity: STOs and IEOs.180
B. Security Token Offerings
STOs are legally compliant, licensed ICOs which protect investors against fraud.181 The value of the token is based on the company’s valuation.182 STOs are only available for accredited investors.183 In 2018, 119 security tokens were launched by capital investor firms, raising over $17 billion, with the majority
172. LACITY ET AL., supra note 84, at 29.
173. Id.
174. *Id. *
175. Jay Clayton, Statement on Cryptocurrencies and Initial Coin Offerings, U.S. SEC. & EXCHANGE COMM’N (Dec. 11, 2017), [https://perma.cc/FZ6Z-5KMG].
176. LACITY ET AL., supra note 84, at 29.
177. Billy Bambrough, A Gold Standard of ICOs Is Needed – But It Won’t Be Easy, FORBES (July 4, 2018), [https://perma.cc/XJ6E-52C5].
178. See Jeff Kauflin, Security Tokens Were Supposed to Transform Crypto. So Far, They’ve Flopped., FORBES (May 21, 2019), [https://perma.cc/4L4X-BGQ3].
179. Funds Raised in 2018, ICODATA.IO, [https://perma.cc/MKG8-EACW] (last visited Feb. 25, 2020); Funds Raised in 2019, ICODATA.IO, [https://perma.cc/MGN9-ECV7] (last visited Feb. 25, 2020).
180. What Is a Security Token Offering (STO)?, supra note 171; Chavez-Dreyfuss, supra note 171.
181. What Is a Security Token Offering (STO)?, supra note 171.
182. Roger Aitken,* Bitcoin Aside, After ICO’s Are STO’s the Everyman’s IPO?,* FORBES (Feb. 18, 2019), [https://perma.cc/U2M5-ESPS].
183. Chrisjan Pauw, What Is an STO, Explained, COINTELEGRAPH (Feb. 21, 2019), [https://perma.cc/44GC-U32H].
of that in the last quarter of the year.184 A number of STO standards are emerging, which will make it easier for investors to liquidate.185
C. Initial Exchange Offerings
IEOs are a funding round conducted on a cryptocurrency exchange. Investors fund their exchange wallets with coins and use those funds to buy the fundraising company’s tokens.186 Many exchanges now comply with AML and KYC regulations on customers and also vet the fundraisers, making IEO investments less risky than ICOs.187 Binance, Huobi, OKEX, KuCoin, and BitMax are examples of exchanges with IEO services.188
184. See Tim Fries, STOs v. ICOs: What’s the Difference?, THE TOKENIST (Sept. 15, 2019), [https://perma.cc/4X9M-4GBK].
185. ERC-20, ST-20, R-Token, ERC-1400, and ERC-1404 are token standards gaining acceptance. Jonathan Chester, How to Run a Successful Security Token Offering in Compliance with New SEC Guidance, FORBES (Apr. 15, 2019), [https://perma.cc/R2EZFLX9].
186. See Andrey Sergeenkov, Initial Exchange Offering—The Next Popular Fundraising Scheme in Crypto?, HACKERNOON (Mar. 27, 2019), [https://perma.cc/3GATYN28].
187. Id.
188. Thomas Winslet, Top 3 Initial Exchange Offerings (IEOs) to Watch in the Crypto Market, THE DAILY HODL (Apr. 11, 2019), [https://perma.cc/7M57-EGWE]; Artur Boystov, Ultimate List of IEO Platforms/Launchpads: Top 15+ Exchanges, HACKERNOON (Apr. 4, 2019), [https://perma.cc/JX3Z-58E4].
Table 2: Comparison of Crypto Funding Models
