Coins, Tokens are Changing the Nature of Early Stage and Goal Fundraising
ICOs (Initial coin offerings) are also called TGEs (token generation events), and they are changing the nature of early stage fundraising, and they have the potential to alter the mainstream investment ecosystem itself.
Through ICOs, start-ups can raise capital by issuing crypto tokens on a blockchain, and sell them to investors or contributors.
Like cryptocurrencies, tokens are interchangeable and tradable. And they are also unique in that their value is derived from something they represent, such as company equity or access to a service, not their utility as a currency or store of value.
Two common types of ICO coins are equity tokens and utility tokens.
Equity tokens are a subcategory of security tokens that represent ownership of an asset, such as debt or company stock.
By employing blockchain technology and smart contracts, a startup may forgo a traditional IPO (initial public offering) and instead issue shares and voting rights over the blockchain.
Additionally, a lender could create tokens that represent debt owned by the company, enabling loans to be bought and sold in a high-liquidity environment.
Many people believe that equity tokens will eventually become the predominant type of ICO token.
Equity tokens are an important part of the future crypto-economy.
While an ICO can be the right tool for project finance, it’s generally the wrong tool for company finance.
The Big Q: Why?
The Big A: Because projects have a dedicated outcome or goal, and the money goes to achieve that goal or fail, whereas companies often pivot, create new product lines, cross categories, and may have several projects going at any 1 time.
For startup companies, it is better to apply risk capital in the form of equity, rather than a utility token.
However, the US Securities and Exchange Commission (SEC) has indicated that equity tokens are subject to federal securities regulations.
Utility tokens, often called app coins or user tokens, provide users with future access to a product or service.
Through utility token ICO’s, startups can raise capital to fund the development of their blockchain projects, and users can purchase future access to that service, sometimes at a discount off the finished product’s sticker price.
An example of a utility token is the Basic Attention Token (BAT).
The BAT token functions as a medium exchange between users, advertisers, and publishers who participate in the Brave browser ecosystem. Advertisers purchase ads using BAT tokens, which are then distributed among both publishers and browser users as compensation for hosting the ads and viewing them, respectively.
Utility tokens are not designed as investments.
But, many people contribute to utility token ICO’s with the hope that the value of the tokens will increase as demand for the company’s product or service increases.
Utility token price fluctuations can be compared to those of sporting event tickets. The value of a ticket to a future sporting event may increase if one or both of the teams wins a significant number of games and becomes a contender for the championship.
On the other hand, that same ticket may decrease in value if a Star player suffers an injury or a team goes on a prolonged losing streak.
While both equity and utility token prices may fluctuate, the Key difference is that equity tokens entitle the holder to ownership rights, while utility tokens function as coupons and do not provide holders with an ownership stake in a company’s platform or another asset.
Again, for startup companies, it is better to apply risk capital in the form of equity, rather than a utility token.