ICO market moves to pre-sale deals

August 21, 2018 9:00 am



at Cryptonomos

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The summer is almost over. Local markets are full of seasonal vegetables and summer flowers are in full bloom, but we’re cooling off. We’re trying to squeeze what more we still can out of a beautiful summer, but one can’t help but think ahead to winds, raincoats and darker evenings. We’ll see no more summer terraces until next March.

In the meantime people are grabbing last-minute deals in the sun: Greece, the Azure coast and the Med. Among them are surely the financial regulators.

Regulators do deserve a good rest. For the last year they have been working hard to protect mom-and-pop investors from the “new evil” in the market of financial instruments – initial coin offerings (ICOs).

In 2017 the ICO boom caught regulators by surprise, but in 2018 they took revenge.

From January – July hardly a week passed without another development from regulators, be it the SECthe European Commission, or their Asian peers. They warned non-accredited investors against putting their money in ICOs, advising them not to take risks associated with such deals.

Such policies did achieve results; many ICO projects indeed changed their plans and strategy. The increased scrutiny made them hire more lawyers to navigate the new regulation, and these guys never come cheap. But additional costs did not help them to increase their investor base, because the ICO market of 2018 has little resemblance to the ICO market of 2017.

It is no longer the market of bored housewives, teenage prodigies and office clerks. Now it is the market of venture capitalists, family offices and crypto hedge funds. About 18 percent of funds raised in ICOs this year were exclusively through private sales, CoinSchedule says.

The ICO market has become less democratic. ICOs are increasingly reliant upon institutional investors for their funding, CointSchedule reports. According to CoinSchedule, a number of potentially blockbuster sales, including the $1.7 bn Telegram ICO, ended up cancelling their public sales because they raised enough money privately before ever opening their sale to their public.

By eliminating public sales, ICO projects can save from $1 million to $3 million that they would otherwise be forced to spend on legal, marketing and advisory services, says Lex Sokolin from Autonomous (as quoted by Bloomberg). $3 million is a lot of money. Excluding Telegram, ICOs raised on average $30.7 million this year through June, according to CoinDesk data. Selling tokens to accredited investors is not only cheaper but much easier too because less regulation is applied to them.

At first glance, the global ICO boom appears to be far from slowing down. ICOs have raised $18 billion this year, almost five times last year’s total according to CoinSchedule. It’s worth noting though that this result was helped by several mega-ICOs, including Telegram.

In fact, the state of the ICO market is a much more mixed picture. The change towards pre-sale capital raises eliminated scam projects and weak startups from the market, which is obviously a good thing that brought greater maturity to the market. However, many sound and legitimate, but not very big, ICO companies were caught off-guard.

First, they had to take pause to adapt their strategies to the new environment. Second, they soon came to realise that it takes longer to raise capital through private pre-sales only. According to Tokendata, pre-sale activities add at least a month to the ICO process.

For many ICO startups, adapting to this change was a brutal experience. Most of them missed their targets in the 2nd quarter, says ICORating. Although money continues to flow into the market, only a very small group reached the $50 million milestone, while a large number of ICO projects were only able to gather around $100,000. ICORating believes that most of the ICOs that failed were those with poor products.

It seems that regulators can enjoy their well-deserved vacation. They have protected mom-and-pop’s money, but made it more difficult for weak ICO projects to raise funds and sent a clear message to stronger companies that the period of easy money is over.

Does this mean that the ICO market has become tougher for average players that seek to raise around $20 – 50 million? Yes, raising capital has become more difficult for them. But conventional wisdom says that the market is always, always a step or two ahead of regulators. There is no lack of money waiting to enter the ICO market, and those ICO projects that will be the first to figure out how to work in the new environment will be justly rewarded.

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