Raising Money in the Crypto World Has Gotten a Lot Harder
01 April 2019 - 12:29AM
Dow Jones News
By Paul Vigna
The ICO market is dead. Just about, anyway.
Startups raising money via initial coin offerings brought in
just $118 million in the first quarter, according to data from
research site TokenData. In the same period in 2018, companies
raised $6.9 billion.
Investors have been spooked by regulators' clash with ICOs and
the overall bear market in cryptocurrencies, where prices are
plunging and trading volume is shrinking. It has gotten so bad that
the creator of one project, called Sponsy, canceled its ICO and put
it up for sale on eBay Inc.
The drop in ICOs is the latest sign that the crypto boom of
years past got ahead of itself, and that potential investors are
changing from enthusiastic to skeptical.
ICOs became important to the crypto market because they allowed
companies to bypass traditional funding sources to raise money. In
an ICO, investors buy a bitcoin-like digital token related to a
product or service a crypto company plans to offer. But the unruly,
unregulated mania that followed created its own problems.
Of the 2,500 projects TokenData tracked since 2017, 55% of them
failed to even raise money. Of the ones that did, only 15% are
trading at or above the original issuance price.
"Token sales as they happened in 2017 and 2018 are pretty much
dead," said TokenData founder Ricky Tan.
ICOs began in 2014 but exploded in 2017, when the software to
run an ICO was standardized. That made it easy for startups of any
size to try to raise money from the public. Cryptocurrency prices
were also soaring, which emboldened investors to try their
luck.
Just as the market was heating up, the Securities and Exchange
Commission began investigating the phenomenon. Since then, the
commission has issued a series of enforcement actions against
crypto startups showing it regards some ICOs as securities and thus
subject to securities laws.
Many companies seeking ICOs were little more than ideas on
paper. Others showed hallmarks of fraud.
At their respective trading highs, the hundreds of small
startups that created ICO tokens had about $24 billion worth of
cryptocurrency and cash in their collective treasuries, according
to a report from the derivatives exchange BitMex. That has since
fallen to about $5 billion, largely because the tokens have lost
value.
As problematic as ICOs have been, the idea of them is still
worth developing, said attorney and consultant Joshua Ashley
Klayman. She said she expects that will continue as regulators
define terms that would help startups raise money in ways that meet
regulations.
Two states, Delaware and Wyoming, have approved legislation that
would allow companies to incorporate and offer digital securities.
Circle Internet Financial Ltd. this year acquired a corporate
crowdfunding platform called SeedInvest. Eventually, startups will
be able to use SeedInvest to sell digitally created and recorded
equity stakes.
The ICO itself may go away, but the market for digital
securities won't, Ms. Klayman said. "I'm hoping it's just dormant,"
she adds.
Ivan Komar, a 21-year old student at Belarusian State
University, started building a startup called Sponsy last year when
ICOs were still a mania. The idea was for a blockchain-based
platform that would connect people who needed to raise money with
potential sponsors. By the time Mr. Komar was done building Sponsy,
however, so was the boom.
"The ICO has disappeared, vanished," Mr. Komar said.
Mr. Komar listed Sponsy for sale on eBay. He got one bid for his
asking price of $60,000. He said Friday he planned to accept
it.
Write to Paul Vigna at paul.vigna@wsj.com
(END) Dow Jones Newswires
March 31, 2019 09:14 ET (13:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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