Legal Domiciles of ICO teams

Tuesday, March 6, 2018

For the third month in a row, ICOs have raised more than $1B, with 55 projects collecting $1.2B in February 2018. To put this into perspective: In the first two months of 2018, ICOs have already raised 50% of 2017’s total capital…and this is excluding the monstrous Telegram sale which is on track to raise $1.5-2B. There are no signs of a slowdown despite increased regulatory action – more than one hundred new ICOs launched in the first 3 days of March and the popularity of private pre-sales continues with pre-sales contributing to 55% of the capital raised in February.

Nonetheless, through the noise, we’ve seen some developments in the first two months that we’d like to dig deeper into.

Token Geography: Are ICOs moving because of regulation?

What do the US, China and Lithuania have in common? 

  1. They’ve all underperformed at the 2018 Winter Olympics.
  2. They’ve never won a prize at the Eurovision Song Contest.
  3. They’ve all been home to a large percentage of ICOs

The answer is that this was a trick question and all three answers are correct.

Our comparison of legal domiciles of ICOs in 2018 and 2017 show a few surprises:

  • The U.S. continues to be the country in which ICOs raise the most capital, despite the SEC’s increased attention.
  • Capital raised by teams in China and/or Hong Kong has already surpassed capital raised in 2017…PBoC who?
  • Switzerland, a self-proclaimed “crypto friendly” country, has not attracted significantly more ICO capital in the current regulatory climate.
  • For reasons unknown to us, Lithuania, one of the beautiful Baltic states, has a sprawling token community that apparently can’t get enough of ICOs.
  • Gibraltar, a country with only 32k inhabitants has been home to $78M worth of ICOs….

We’re curious to see how some of these patterns will change over the next few months, as we expect regulators to step in more often and more aggressively. Additionally, we have to take into account that the trend of pre-sale dominance is causing this data to be a lagging indicator due to a longer fundraising cycle.

How Token Sales get Airdrops Wrong

TL;DR: Some token sales think that airdrops of tokens can help them avoid regulations and increase valuation. This is not the case.

ICOs that have sold a majority or all of their tokens in pre-sale rounds often revert to a relatively small airdrop of tokens (<5% of token supply) to people who were subscribed to a public sale which got cancelled after all capital was raised in the pre-sale.
While airdrops can make economic sense (they broaden the initial user base, thereby increasing the potential network effects of the protocol/application), we’ve seen some ICOs revert to airdrops because they believe that:

  • a) Airdrops reduce the regulatory footprint in terms of securities laws: 

    “We’re not ‘selling’ tokens to people!”

  • b) Airdrops increase a project’s valuation instantly:

    “After our pre-sale in which we sold 10 million tokens at $1/token, we’ve now created 10 million additional tokens that we’re giving away for free, so our valuation is now $20M!”

Although we’ve slightly exagerrated them, both types of reasoning are wrong. Here’s why:

  • a) Airdrops are still subject to securities regulation: Imagine you’re a team launching an ICO and you’ve just concluded an oversubscribed pre-sale of your tokens. You raised funds from accredited/institutional investors only and have done a full KYC check on them. You cancel the public sale because you have enough money and because you think that a public sale carries too much regulatory risk of selling security-like tokens to unaccredited investors. However, you now have to deal with 25k angry members of your Telegram channel and 10k twitter trolls who had all subscribed to the public sale.

    Therefore you  decide to airdrop some tokens to keep them happy.

    If [insert favorite regulator here] comes knocking on your door in a few months and you answer with “But we’ve only sold tokens to accredited investors” you really need to read this Coincenter article about airdropped tokens being subject to securities regulation. Alternatively, read this article about  Oprah’s Ultimate Car Giveaway if you prefer memes.
  • b) Airdrops should not affect an ICO’s “valuation”:  Imagine you’re a team launching an ICO and you’ve just raised $36M by selling 36M tokens at $1 in a private round to accredited investors. For all the right reasons you decide that’s more than enough money to build v0.1 of your dApp on ETH testnet and cancel the public sale. However, you still want people to give your dApp a try once it launches.

    Therefore, you decide to airdrop 4 million tokens to people who showed interest in your dApp.

    Despite the fact that your tokens were sold at $1/token in the private round, you’re NOT adding $4M of extra value to your project by just creating an extra 4 million tokens out of thin air. Unless $4M miraculously appears in your cold storage wallets, your project’s valuation is closer to $36M than $40M. If you still believe the latter number, tell your in-house “cryptoeconomist” to read up on everyone’s favorite Italian-American Nobel prize duo.

    (N.B. for the econ geeks among you: We acknowledge that tokens are strictly speaking not the same as equity, but we do believe that increasing the number of outstanding tokens for no monetary compensation should have de-facto dilutive effects on the price per token. Any increase in value per token attributed to increased “network effects” caused by the airdrop is unlikely to outweigh the dilutive effects)

ICO Calendar: 30 Sales

Mon (3/5)

Tue (3/6)

Wed (3/7)

Thu (3/8)

Fri (3/9)

Sat (3/10)

Sun (3/11)