By Matt Levine via bloomberg.com   Article

“Is there a good way to think about initial coin offerings? The idea of an initial coin offering is that a company builds, or promises to build, some blockchain-based platform that allows people to buy or sell some product or service. (It seems like it’s usually cloud storage.) And then it creates a digital token — its own “coin” — that you have to use to buy or sell the product. And then it sells the coins, all at once, to the public, often before the product is fully up and running; the buyers can use the coins to buy the product, or try to sell them to someone else for a profit. And then the company goes to conferences to gloat about how it has disrupted the venture-capital funding model and shown the way to the future of capitalism and so forth:

More and more startups are offering tokens as a way to raise money upfront in so-called initial coin offerings (ICOs), a nod to traditional initial public offerings of securities. So far this year, 63 sales have raised $521 million, according to blockchain research firm Smith + Crown. That has already far surpassed the $260 million raised in 2016, says Emma Channing, general counsel at Argon Group, a year-old digital finance investment bank in Los Angeles.

One thing you could think about is what this tells us about how businesses should be funded. Most companies want to sell a product, don’t have enough money to build it, and so go to investors to get the money. Then they build the product, sell it to customers, get money from the customers, and give some of the money back to the investors. Raising money from customers rather than investors, as ICOs notionally do, has some obvious appeal: It cuts out the middleman, in a sense, and it also lets the company share some of its profits with early-adopter customers rather than investors. The company and the customers are necessary components to the system; the investor, in the new model of blockchain capitalism, is just an interloper, and can be dispensed with.

On the other hand, if a company has raised tens of millions of dollars by pre-selling its product to customers before ever building the product, why would it build the product(‘When ICO’s deliver 100% of the company’s expected receivables at launch, founders are incentivized to leave their project immediately thereafter,’ writes Chris DeRose.) This is a problem for investors too — if a company has raised tens of millions of dollars by selling shares to investors before ever building a product, why not run off to Belize rather than build the product? — but there is a well-developed set of legal protections for investors, for exactly that reason. The legal status of coin-buying customers is a little vaguer.”


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