However we are coming across more and more projects avoiding public sales all together, opting instead for phased out private-only rounds structured as traditional equity rounds or SAFTs/private pre-sales, or a combination of both in sequence. Data provided by our friends from Tokendata show that, in January, $180 million worth of capital was raised by projects that had initially planned a public sale, but eventually cancelled it and raised privately. These include Olympus Labs, Nucleus Vision, Coinfi, Shipchain and a bunch of others (not going to lie, we had not heard of most of them). Of the balance, anecdotally 50-75% was possibly raised via private pre-sales.
Why it is happening
There are a few possible reasons why we think this is happening:
- Fear of regulatory heavy-hand after recent examples of SEC enforcement. Founders would rather focus on accredited investors in private sales to be on the safer side. There still isn't a clear regulatory framework for the sale of utility tokens, the SAFT framework is giving founders and investors some degree of comfort, but as we've seen last week the SEC is not settled with it and convoluted work-arounds can end up in tears (e.g. Tezos)
- Institutional capital has finally caught up, be it down to FOMO, improved infrastructure or understanding of the market opportunity. All the necessary funds are now available without the need to go for an expensive, laborious and risky public sale
- The run-up in ETH price in the last months of 2017 meant that many projects that have closed private sales in September-October time are now sitting on more capital than they had anticipated, therefore not needing the extra juice from a public sale
- Most projects don't actually need wide distribution to end users due to the token use case (e.g. addressing enterprises) or model (e.g. some work tokens), and would rather lock-in medium-long term focused institutional investors or strategic partners rather than short-term flippers.
- Signalling. The best teams signal to the market that they are in it for the long term by subjecting themselves to professional investor diligence and oversight from early on. As we pointed out in the past, with exceptions, a public ICO is likely to suffer from adverse selection.
- A different cohort of founders may be entering the market, one that values and actively seeks the help from traditional investors in company building, governance etc.
- More sanity. Founders finally realize the critical importance of network design and token economics for the long term success of the project, thus buying more flexibility and runway to perfect those before launching. There is limited room for manoeuvre once a token is issued.
What does that mean
We think we are likely to see more of the following this year:
- Increased popularity of alternative token-distribution models aimed at driving actual usage and curb speculation (faircoins
, more work-to-earn models like Earn, SteemIt, Gems, forks & airdrops etc). There is presumably less regulatory risk in letting users earn or win a token than in selling it to them.
- Public sales for utility tokens where broad end-user distribution actually makes sense will continue adopting and iterating on fairer models insofar as governance and price discovery are concerned (e.g. DAICOs and interactive coin offerings)
- Increasing importance of and demand for disclosures from insiders (eg vesting, lock-ins, sales etc). What Aragon
etc are doing in terms of transparency will become table stakes, hopefully quickly.
- Boom in fully compliant security tokens, fuelled by the emergence of platforms like TrustToken, Securitize, Polymath, Templum etc.