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  • Peter Kam Fai Cheung SBS

Initial Coin Offerings

You may have practised crowdfunding by donating, and Initial Public Offerings (IPOs) by investing, but have you practised ICOs (Initial Coin Offerings) by speculating? ICO is a means by which funds are raised for a startup project for a new crypto-currency venture. Some startups begin to use ICOs as new marketing alternatives to finance (innovation) projects from the crowd, rather than relying on kind donors or investment-minded venture capitalists.

ICO is based on a business model/plan which should cover the business's value propositions, its capacity like assets or partners to deliver, and the needed financial support for key activities before generating revenue streams. Similar to a successful startup that can exit via IPOs, a percentage of an ICO startup's equity is sold to raise money to finance its project, whatever that may be. One of the big differences is that the ICO startup finances itself online upfront, by creating, issuing and selling its new crypto-currency to crowd speculators who would not be its shareholders.

While there was proof of concept (such as the 2015 Ethereum's project on a software platform that should support smart contracts via its crypto-currency "Ether"), such generally unscreened but trendy ICO crowdsales of "software presale tokens" might end up as crowd speculators' throwing good money after bad. Many startups, even screened and backed up by venture capitalists fail fast due to a variety of innovation, marketing and governance reasons. For the successful few that can exit via IPOs, they still might not be able to sustain the momentum or get sufficient investors' interest eg due to overvaluation.

Assuming the good faith of originators and backers of ICOs, new crypto-currencies are not generally accepted as legal tenders and have no intrinsic value, unless the new fintech crypto-world becomes the order of the day. Meanwhile, ICOs disrupt the conventional (innovation) financing and economic development, and central authorities (such as those in China & South Korea) might have second thoughts about ICO governance, rendering the future exchanges of crypto-currencies uncertain. As ICO-related counter-measures via public administration and civil enforcement begin to take shape around the world, I believe it would not be easy for speculators of ICOs to put the odds in their favour, consistently!

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