One of the hottest trends among high-tech startups is using cryptocurrency to raise capital through initial coin offerings (ICO). Over $1.2 billion has been raised this year, and in July Tezos raised the largest ICO to date for $230 million. Tezos’ raise came off the heels of the Bancor raise for $153 million. Although the effort experienced some hiccups with delays, it was largely successful as it attracted notable investors, including Tim Draper and Blockchain Capital. Other recent successful raises include a $35 million raise from web browser start-up Brave, and a $12.5 million raise from Gnosis, an ethereum-based prediction market.


Underpinning the surge in initial coin offerings is a broader boom in digital money. As widely reported in the press, Bitcoin and ethereum have soared in value in recent months. Investors in an ICO are hoping that the businesses will become successful and the coins will become more valuable as people flock to the platforms. Proponents of initial coin offerings hail them as a financial innovation that empowers developers and gives early investors a chance to share in the profits of a successful new enterprise. ICO has attracted thousands of engaged supporters and early adopters who were extremely motivated to see their company succeed.


At this point however, the government is still trying to figure out an appropriate regulatory regime, even as many investors are concerned about a lack of investor protection given recent hacks. The SEC is looking to require issuers to register their tokens with the SEC, while also drawing exchanges that trade cryptocurrencies into the agency’s remit. Recent volatility displays some of the signs of a market bubble for ICOs, and security continues to be an issue. Despite, the breadth of interest from a broad range of investors, traders and market makers – it is unclear if this business is here to stay or a flash in the pan.


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Ken Margolis | Managing Partner Castle Placement, LLC
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