The general method of fundraising equity for a startup venture is either to go through Regulation A, Regulation D, or Title III for crowdfunding ventures. Reg A applies to non-accredited investors, and Reg D is mostly for accredited investors with a small carve-out in 506(b) for a small number of non-accredited investors. Title III investors do not have to be accredited but certain investment limits are required based on the investor’s income. Generally the fundraising amounts are limited in Reg A, unlimited in Reg D, and limited to $1 million through crowdfunding Title III. The expense of going through preparing the paperwork for any offering is substantial, although of course, Reg D is the cheapest because only one document needs to be filed with the SEC and is otherwise exempt from registration. More information on these fundraising mechanisms can be found on the SEC site or other places online, what we’re discussing here is the Initial Coin Offering which is a new venture fundraising mechanism that is not subject to government review, oversight, or regulation, at this time.

An Initial Coin Offering occupies a middle ground between equity ownership and employment by the new venture. While the scope of this mechanism has been gradually expanding into the passive investment arena, it has previously been used to offer tech savvy entrepreneurs and developers first dibs on a new open-source platform which is intended to be available to anyone to further develop and improve, which is the meaning of open-source (any developer is free to use the platform and develop applications and new uses for it). Such individuals would contribute either cryptocurrency such as bitcoin or ethereum, or fiat dollars to the new venture receiving an entirely new and worthless coin in return. The presumption is that these investors have an incentive to disseminate the use, knowledge, and possibilities of the newly developed platform among the tech community, developing or encouraging the development of new applications for it. With increased use of the new platform its value and correspondingly the value of the newly issued cryptocurrency should increase providing a return on investment much like shares do in a corporate setting. There may be voting rights with regards to the startup associated with the distributed coins or there may not be any such rights, depending on the individual ICO.

The difference is that generally securities are marketed to the public, and such investors are not expected to contribute in any way to the success of the venture beyond their financial contribution. In an ICO the startup actually obtains an added benefit of potentially uncompensated labor from a given investor which may contribute to the success of the venture. Such an investor does not have to do any work, but merely advertising or disseminating information about the new platform to his/her network may generate interest and additional labor investment from third parties simply because of their interest in the new platform. This is a very efficient use of capital, maximizing a given investor’s value to the new venture.

Another concept that has been utilized is a “proof of burn” concept, which is simply the isolation and locking away of the cryptocurrency received from investors in an unusable virtual vault, so that there is no apparent threat of the misuse of the investors’ funds and all parties, the employees of the venture and its investors, are on an equal footing with equal incentive to develop the new platform and see its value increase through new application regimes. The locked cryptocurrency would at some point be unlocked and used to grow the venture once a certain trigger point is reached, an example would be the increase in value of the issued coin to a certain value or the platform being implemented by a certain number of users, or when other clearly measurable goals are reached. This type of ICO could provide great incentive to investors to put up their funds because the typical credibility concerns around ICOs’ lack of accountability and regulation is tackled directly at the outset, preventing any possibility of theft or fund misappropriation.

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