Cryptocurrency is the watchword in the financial industry today. Historically, startups have approached venture capitalists to get funding, as there was no other option. Then came the option of equity crowdfunding, which was about seeking funds from the public in return of giving them a share of the future pie.
Today, many startups have moved from crowdfunding to the ICO (Initial Coin Offering) model for their fundraising options, instead of venture capital. Startups are able to raise millions using ICOs as an avenue for their funding.
ICO Fundraising Benefits
ICO investment is done entirely using cryptocurrency, so there are no regulatory burdens and companies do not need to follow legalities. Companies can raise unlimited capital through ICOs and accept investment from anywhere across the globe.
Startups started raising funds by using utility tokens through ICO processes.
Sounding the Death Knell?
ICOs offer an option for fundraising on blockchains, but today there are new problems cropping up and this has resulted in some new and innovative fundraising options that could be the death knell for ICOs.
The United States Securities and Exchange Commission (SEC) has begun cracking down on ICO processes, which has slowed down the utility tokens being issued by ICOs during the past few months. The SEC is raising some doubts about the tokens from ICOs and whether it falls under their regulations.
Though ICOs are still popular this year and have raised more than $6 billion, companies are looking at other viable options for fundraising:
- Initial Loan Procurement
The first Initial Loan Procurement (ILP) has been created by Blockhive. In this new option, investors are like creditors lending their money to the startup. The startup pays the loan back on a fixed, legally binding date. Blockhive is issuing HIVE tokens using smart contracts as proof of the loan agreement.
ILP is a good alternative, using blockchain technology, for companies to raise funds. Token holders can support several companies.
Startups are now turning to Airdrops for fundraising options. Airdrops do not raise funds, so there may not be regulatory hurdles in this method of fundraising. It can be compared to free giveaways of stocks.
Startups like eBoost will be conducting an Airdrop instead of receiving funding through ICOs.
It is free to participate in Airdrops, so it might not come under any regulations where cryptographic tokens are illegal. However, that said, users are being warned not to give away the passwords to their online wallets in exchange for such free coins.
- Security Token Offerings
Security Token Offerings (STOs) use blockchain technology and offer liquidity to companies. This will open up the door to more investors who will be willing to invest in the early stages of a company.
Security tokens are like financial securities backed by assets. When startups receive security tokens, the investor gets company equity or a percentage of the company profit along with some company rights. It is executed through a smart contract.
STOs are expected to be the next big wave in fundraising options for entrepreneurs. It ensures that there will be regulatory compliance from both parties, namely the entrepreneur and the investors.