This is the second part of an essay explaining some of the implications of Reverse ICOs in the digital currency markets. The first part explored some of the fundamental concepts of Reverse ICOs and highlighted several of the most obvious implications that the market should consider if Reverse ICOs ever materialize as a viable mechanism for raising capital. Today, I would like to continue that discussion with a few more ideas related to the implications of Reverse ICOs.
6 — Token-Based M&A
Stock based acquisitions are fundamentally hard for startups given to the subjective nature of private valuations. Crypto-Tokens change that picture dramatically as they have a very tangible market value and offer an immediate path to liquidity. As a result, we might soon see a generation of “cash and token” M&A models in which private companies are acquired using digital tokens as the underlying currency.
7 — Token Short Selling
Suppose that there is a private startup that recently raised a large round of institutional financing and you believe the company is totally overvalued. Today, there is no market mechanisms available so that you can profit from that analysis. You can’t short sell shares of a private company as they are not actively traded. Even in the case of an ICO, it is not clear if short selling would work as crypto-tokens are not directly tied to the company’s valuation. All that changes with Reverse ICOs. If the mechanisms are available( which they are not today), I could potentially short sell a crypto-token based on a thesis that predicts the poor performance of the company.
8 — A New Programmable Legal Framework for Crypto-Securities
There is a lot of legal work behind every IPO that could be directly applied to Reverse ICOs. From a market taxonomy perspective, Reverse ICOs are likely to be considered securities and subjected to similar regulations. A minor caveat, I believe that the legal and regulatory constraints around Reverse ICOs should be expressed as Smart Contracts that can be enforced programmatically in the blockchain. In my opinion, we are likely to see a new type of legal programmable frameworks powered by the Reverse ICO movement that embed legal contracts as part of digital tokens.
9 — Token-to-Stock Conversion Models
Suppose that a startup that executed a successful Reverse ICO decides to go public a few years later. How will the digital tokens be valued in reference to the shares of the IPO? Let’s now take the opposite scenario of a publicly traded company that creates its own digital currency and wants to execute a Reverse ICO. Is that even possible? If so, should there be a path for shareholders to convert shares to tokens? All those questions are highly speculative at this point but I think some models for bidirectional stock-to-token conversations should be explored in the near future.
10 — A New generation of Financial Products for Reverse ICOs
IPOs brought together a large number of financial products such as futures, options, index-funds, hedge funs, mutual funds, quant trading and many others. Similarly, ICOs and Reverse ICOs are likely to produce a new generation of financial products or extend some of the existing one to the new token economy. Given the similarities between Reverse ICOs and IPOs, many of the existing IPO-based products will have an equivalent in the Reverse ICO world.