One of the reasons that the cryptocurrency market has been in a bear market is the uncertainty concerning crowdfunding for projects. Initially, the Security and Exchange Commission (SEC) in charge of regulating securities was not really too worried about the platforms that were raising money through decentralized platforms like Ethereum. Recently, that has changed with them cracking down on some of these platforms so this has struck fear in platforms trying to raise money for their projects.
Last year a lot of platforms raised so much money through what are called initial coin offerings (ICOs). Personally, I think that the ICO name was kind of taunting the SEC because the SEC was in charge of initial public offerings (IPOs). The choice of a name that mimicked what they have been regulating probably rubbed them the wrong way. Anyway, ICOs raised 5.6 billion dollars in 2007 and by the first quarter of 2018 raised 6.3 billion dollars which is already more than what was raised last year. This huge amount of money has definitely caught the attention of institutional investors and the SEC.
For anyone to be involved in the IPOs they have to be what is called an accredited investor. An accredited investor is a person that has a annual income of about $200,000 for an individual or $300,000 for joint income for the last two years with the expectation of earning the same income or higher in the current year and/or atleast have atleast 1 million dollars in net worth individually or jointly. Meanwhile ICOs have no barriers to entry and because the fundraising platforms are global and decentralized, anybody, anywhere can invest in it, from the villages of Africa to cities of India, South America etc.
This form of crowdfunding is really revolutionary. It has leveled the playing ground for anybody in terms of investing in startups. Anybody that knows anything about investing knows that the huge rewards and also risks come from being in a project from the ground floor. This is the reason the rich keep getting richer, because they are able to get into investments that the regular people cannot get into because of the high financial barrier. There are advantages and disadvantages of both as we have seen since the ICO bubble in cryptocurrency last year.
The biggest advantage is the level playing field that it has presented to everyone. Countries where people had great ideas but lacked funding are now able to fund their great ideas like this. The downfall is that any platform can come up with a website and a whitepaper with “pie in the sky” promises and raise millions of dollars from regular folks. They give what are called “Utility tokens” in exchange for these funds. Some of the early investors that invested in the pre-funding phase who got better deals will dump their tokens on market once they are able to trade them thereby destroying the price of the token. Some other platforms were outright scams and ran away with peoples’ hard earned money. In IPOs, there are vesting periods so initial investors cannot just dump these securities and also rigorous scrutiny about these platforms to ensure they deliver what they promise. This was the reason why the accredited investor program was introduced to protect regular people.
Anyway, the ICOs have slowed immensely because of the prolonged bear market and a lot ICOs did not deliver on their promises. Some ICOs have exit scammed and people are more savvy ICO investors now.
The SEC has also gotten in the game, cracking down on ICOs that seem shady. What SEC has ruled is that most of these ICOs are securities. Personally, I am happy that some of the shady ICOs have disappeared, but I believe that the regulation that the SEC is using called the “Howey test” is a pretty outdated regulation that came into being in the 1946. There has not been clarity with this law in ICOs because the SEC still wants to have the power to go after ICOs. For these reasons, are ICOs dead?
Not in anyway! So far this is very early. Last year, regular people have tasted what it is to be like the accredited investors because of the huge gains or losses they witnessed in their portfolios. They feel powerful once again. Crowdfunding through ICO’s is here to stay and the question is what platform will these be done on?
The biggest crowdfunding platform to date is Ethereum, but it has a competition by a platform called EOS that was launched from the EOSIO software. One of the biggest problems that Ethereum faces is the scaling of the network. Anybody that was in the cryptospace last year knows that the speed of sending your crypto to a fundraising platform during an ICO determined if you got in earlier. When platforms like cryptokitties launched, it almost ground the Ethereum network to a halt and people missed out on ICOs. Also at those times, people had to pay more to get their transactions through. When we are talking about a global network, the speed and the cost of transactions make a lot of difference for those in poorer nations or in the third world countries being able to participate in ICOs that have the potential to change their financial lives if the platform becomes a success.
Telos which will be a fork of EOSIO software with the same transaction speed of about 0.5 second blocks guaranteeing that the speed of transactions will not be an issue. It will also have free transactions. The Block Producers (BPs) securing and validating transactions on the network will have minimum standards which they must have to meet to be Telos BPs. There will also be backup Block Producers that will be rotated pretty often so this will ensure that there will never be a downtime in the network. There will be ways to ensure that RAM, a resource that developers need to build their platform, will be affordable. There will be grants for developers that might not be able to afford the resources. I see developers not only taking the advantage of the affordable RAM price but also using the Telos network for their crowdfunding needs. The Telos network will be a crowdfunding platform to contend with in this space.
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