Initial Coin Offerings(ICOs) have been one of the most exciting developments in the technology world in the last few years. With as many detractors as followers, ICOs are approaching the $2 billion mark in 2017 vastly surpassing the amount of venture capital raised by blockchain startups during the same timeframe. Consequently, ICOs have been on the close radar of governments and regulators with countries such as China and South Korea declaring them flat out illegal. If you are interested on ICOs, I recommend you read my previous articles about that topic. Today, I would like to explore another interesting movement that have been gaining some momentum in the token economy: Reverse ICOs.
Conceptually, Reverse ICOs are trying to address some of the regulatory concerns surrounding ICOs by structuring an equity offering as part of a token sale. Reverse ICOs follow a similar regulatory process to IPOs or growth stage venture capital rounds being constrained to accredited investors and using documents such as Reg A+ or Reg D which are common on institutional financing. At a very abstract level, you can think about a Reverse ICO as an IPI that, instead of a stock sale, issues a digital token,
The full dynamics of Reverse ICOs are still being put together and the infrastructure and tools are not ready yet. However, we are already seeing some encouraging signs such as the first group of token exchanges like t0.com that have been certified by the SEC. Whether Reverse ICOs become a viable product in the token economy or not, there are a few interesting implication of this phenomenon that I think are worth discussing.
1 — A Channel for Crypto VCs
Reverse ICOs are the type of process that is likely to attract venture capitalists invested in the blockchain ecosystem. Procedurally, Reverse ICOs will follow the due diligence and regulatory processes that are common on late-stage funding rounds which should make it more appealing to VCs than traditional ICOs.
2 — Tradeable Equity
Employee liquidity is one of the biggest challenges for private companies. Regardless of how many VC round a company has raised, it is very hard to appropriately price the company common shares. As a result, employees remain uncertain about the value of their stock options and they don’t have many channels available to achieve liquidity. Reverse ICOs will provide employees with tokens that have a tangible market value and are also tradeable in certified token exchanges.
3 — Two Engines to Increase Valuation
In IPOs or late stage private financing, the valuation of a company increases solely based on the investor’s perspective of its performance. With Reverse ICOs, the valuation of a company can also increase drive by the value of tokens which are somewhat independent of the performance of the parent company. A startup whole tokens are actively used will see a higher valuation even if it hasn’t raised a new round of financing.
4 — Dynamic Valuation
Private company valuations doesn’t really change unless there is a new financing event. With Reverse ICOs, the valuation of a company changes every day based on the performance of its tokens. From that perspective, Reverse ICOs valuations models are closer to public markets than to VC valuation models.
5 — An Easier Path to IPOs
There are a few aspects of Reverse ICOs that indicate that private companies that undergo that process will have an easier path towards an IPO. This assumption is based on the similarities between the two models. Obviously, it is way too early to tell.