Unregulated Ico Markets And Utility Tokens...A Marriage Made In Heaven? For The Companies, But What About Investors?
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Just imagine this scenario and think how often this is the case with the ICO market.
Me and 4 (imaginary) friends have been in the software business for a while. We are not very technical but we are knowledgeable about marketing and sales. Last night we were drinking and had an idea. Why not create an online app so people can barter online, but loosely tied to blockchain? ( We need the word blockchain for the marketing. Everyone loves blockchain.) In the next few days, we meet and design the high-level blueprint for how we would like it to work and the problem it would solve (reliability, security/ etc). Now we need to fund this baby. How do we do it? We came up with 3 scenarios and went with scenario C.
A) Hire a few technical developers or outsource the development to a tech firm, actually build a prototype, get it tested, get a few users to the platform on Beta, estimate user growth potential, costs to run the business, opportunities, and threats... all while working our old jobs. (All this costs money so we tap into our savings). Once we have a somewhat solid proof of concept product we reach out to a venture capitalist group ( VC) for $15,000,000 in funding. The VC access the risks and asks us for a 60% stake in the company in exchange for that amount of money. Their point is that we have a good concept, but no users, no real-world testing on volume and scalability, no team, no real management experience running a company, and no real IP (someone can copy everything you just did). So 60% of the company for $15,000,000 is the best offer.
B) after I did the same thing to get a prototype ready, not wanting to give out any equity I go to a bank instead. A bank, however, is a lender and needs collateral and a proven track record. We have neither, so the bank says that will lend you money only if you post personal collateral (I.e. your house, savings, your car, etc), so we can only get as much money as we have in savings, effectively betting your livelihood on the success of this project. My 4 friends and I only have about $2MM in assets, so that’s all we are going to get.
I could trying to go to the equity and debt markets thru a public offering....lol...just kidding... next...
c) What about doing an ICO? After the few days we spent putting the blueprint together we hire a firm to write our white paper for about $20K, a legal team to write the disclaimers for about $10K and a web development firm to build us an ICO website (just a nice looking landing page) and set up our tokens (ERC20) for sale for about $50K at the high end. I spend another 20K in advertisements about my ICO, open a telegram chat and a twitter account, and list my ICO on Icodrops and other ICO websites. I raise $15MM in exchange for 60% of the tokens, I get 20% of the tokens for me and my friends and get another 10% for bounty and advisors (probably all for John Mcafee for 1 tweet ( If you meet John’s standards after he reviews your concept) and Suppo for 1 shill) and another 10% for the company for future needs (codeword for reserve funds for when we are about to run out of cash). My friends and I own 100% of the company's equity, 20% of the tokens, and we have Zero debt! With the $15MM a couple of us quit our jobs, we lease an office for our business and will start developing the prototype, hire a few folks and hopefully makes this baby a success. If not, well, we tried. We had a lot of fun, learned a lot and cost us absolutely nothing and we actually made money from it. Maybe we try again next year.
I am exaggerating here of course. Many companies doing an ICO put a lot more upfront effort than what I described above and are very serious about their projects. But the point is that the lack of regulation in this space makes it very easy for a scenario to happen where well-meaning people, like me and my 4 friends above, with a for-profit idea and no blockchain knowledge, can use the blockchain concept to raise a staggering amount of money from small investors under the cloak of a utility token basically risk free (in our minds at least...wait for the lawsuits for breach of security laws in 3, 2...) These practices, if widespread, can be exploited and eventually will burn many of those investors as these projects fail to meet expectations for world domination since every blockchain project is expected to be revolutionary !. Some, of course, will succeed and be very valuable. This is not a condemnation of the crypto space but a warning about the excesses, and lack of regulations for raising capital. Especially on for-profit companies with no real product or past track record looking for cheap financing options (you know, the ones who don't really need a token but have one just to raise the cash they could not have raised anywhere else).
Here is the FAQ section:
when we raised $15,000,000 dollars we sold 15,000,000 tokens. Why the value of $1 per token? Because we needed $15MM. That's the only logic and nothing ties to actual value.
What drivers the value? Supply and demand.
Where is demand coming from? Originally from the ICO hype and FOMO since my whitepaper was freaking awesome. But those people who bought the ICO will never use my products (think business to business concepts (BTB) like CargoX), they just bought the hype...they will eventually sell to people who will use it, hopefully for more than what they paid for, keyword being hope.
Hope that we build a product, a team, a user base, avoid the competition, and don’t run out of cash before we can do so. Man, no wonder those VC’s wanted 60% of the company to take this kind of risk and the banks lent them no money….No way dude, this is a utility token, blockchain is the future, let’s not worry about it we are all going to be millionaires... When Moon? When Lambo? This baby is so cheap right now after the correction, it’s time to accumulate. It will hit $5 by April. Why? All youtubers with no financial investment background think so, it is on the internet so it got to be true. Long live crypto!