Original Research

Trends in Token Sale Proposals

We’re in the midst of preparing a longer piece on best practices for token sales/ICOs and how the industry can and should move towards a greater degree of self-regulation that might help it stay ahead of a growing worldwide trend of regulatory bodies taking increased interest in ICOs. That piece will also discuss a number of ideas about best practices and what forms that self-regulation would take. (In this regard we’re actually seeing some mildly surprising and at least partially encouraging developments, but we’ll save our commentary on those for the larger article.)

Today we just want to point out a number of interesting trends we’re seeing in the sorts of projects presenting themselves for inclusion on our Smith + Crown ICO tracker page. By virtue of maintaining this list we see virtually all of the ongoing and upcoming ICOs, and as a result have a strong grasp of different trends as they emerge and evolve.

Lately a few distinct, largely positive patterns have emerged that we wanted to highlight. We mention a few different companies in order to illustrate the trends, but do so merely to provide examples of what we’re seeing in terms of evolving practices in the ICO industry, without any implied endorsement other than to recognize their place within these patterns.

That said, much of what we’re seeing falls within a few identifiable trends:

Fewer and fewer anonymous teams

While at Smith + Crown we have refused to list truly anonymous teams (there are a couple  theoretical exceptions, but they are rarely even appealed to, much less invoked) but the increasingly small number of anonymous proposals that are even submitted to us is a reassuring trend. It could be that our policies on this are well known and anonymous groups are not even bothering to submit to us, but we suspect that the numbers of such groups are also declining significantly, and we feel this represents a very positive development in the growth and evolution of the sector. An end to the anonymous presentation of ICOs, whether seeking $10 or $10 million, might even help popular media outlets beginning to be interested in the sector to not feel compelled to include in their articles the obligatory reference to “scam-ridden world of ICOs where anonymous teams can raise XX millions with only a cobbled together white paper.”

Altered vesting structures

While the earliest visions of decentralized organizations tended to assume that founders of a project should retain a small number of tokens as an expression of their desire to see the ecosystem develop and prosper free of the outsized control of a major holder, this has recently begun to change. Likely influenced by an increasing number of management teams coming from outside the sector itself, the trend we see is of manangement retaining a somewhat larger number of tokens as an incentive aligning their interest in creating a vibrant, prosperous community or project with the interests of token holders and users. While insiders retaining a large number of shares is obviously a fine line, the general trend appears to be moving from teams holding 6-8% of tokens in 2015-16 to closer to 20-25% today. Arguably more significant is the lengthening vesting schedules for insider token holdings. Whereas 0-24 months was typical for vesting schedules up through 2016–during which vesting was incredibly rare at all–now vesting schedules are now stretching into the 36-48 month timeframe and are another strong measure of management commitment to a project. Some of the most prominent sales of 2016 (Golem, Waves, Lisk) had no obvious vesting schedules at all.

Creative practices and procedures around the ICO are being explored

One trend is that a growing number of ICOs are fully implementing Know Your Customer (KYC) practices. Not only does this serve to avoid the frenzied rush of many earlier ICOs–environments that lent themselves to hacks, thefts, and whatever other nefarious activities within the chaos of those initial moments–but some of these ICOs have also established contribution limits in an effort to ensure a wider distribution of their tokens, and by extension, interest and participation in their project. Yes, these can often be circumvented, but when combined with pre-registration and KYC practices, it is increasingly challenging to do so. Civic, Modum.io, Cindicator and cofound.it projects are good examples of these. ICOs are also assigning pre-vetted customers specific windows during which to purchase their tokens during assigned windows. This further reduces the frenzy of the ICO, increasing security and helping to ensure mistakes are eliminated, if not reduced. Trends in distributing ICO contribution addresses are becoming more sophisticated, again reducing opportunities for nefarious activities while also reducing the chances that a contributor will themselves make a mistake.

It could be argued that some of these trends go against the open, distributed nature of the blockchain and return the advantage to those traditionally able to acquire access to the best early stage opportunities. However, not all projects are barring “retail investors”–rather they are barring anonymous investors. These developments also signal a certain stage in the maturity of the sector, one in which a greater amount of money is entering the space. An element of the original spirit of the crypto world may be (partially) lost within this process, but the money flowing into the sector will allow a range of new projects to be funded, a fact which should please anyone interested in seeing decentralized projects spread more broadly. Finally, the sheer quantity of projects appearing lately strongly suggests there will opportunities for most interested parties to acquire the tokens in projects they choose to support, particularly as many of the new opportunities that will appeal to larger blocks of capital are arguably not the same projects appealing to individuals who have long followed the crypto sector. So far, these are emerging spaces continue to allow a place for anonymous supporters, retail investors, and accredited investors, though how large the opportunity becomes for each of these groups remains to be seen.

Strong industry specific teams

Another clear indication of a maturing industry is that more and more highly experienced individuals with strong industry-specific skillsets are staffing project teams. This represents an obvious change from several years ago, when leadership teams might have been composed exclusively of developers. The example of Robin Lee, former CFO of the World Gold Council and principal accounting officer of GLD, the exchange-listed gold ETF, entering the sector as the head of HelloGold, clearly illustrates the trend, but he is in merely one a number of highly competent, experienced individuals who could be pointed out in this regard.

Sophisticated business organization and structure

Another trend that appears to be developing is that as groups of individuals bring extensive experience from a particular industry (ticketing, marketing, and payments are a few that come quickly to mind) and seek to apply blockchain technologies and the innovations they promise to a sector they know well they can bring with them an established sense of best practices that help raise the standards within decentralized companies. While some of these entities might be criticized by some for merely applying a decentralized layer to a traditional centralized industry, such companies nevertheless represent expansions in the areas blockchain companies are focusing their energies, which most would agree is positive for the future growth of the sector. An example of the type of practices such groups might bring could be a business plan that calls for the scheduled release of quarterly and annual filings informing investors and token holders of the status of the project, rather than just allowing smart contracts to allocate fractionalized dividends or payment holders to token holders at designated moments. (Examples include modum.io and Acuitty.)

Developments such as this will help the ICO space and the companies operating within it to increase their appeal to a larger pool of investors who will feel more comfortable with their ability to understand, analyze, and evaluate the companies operating within it. Of particular interest, and we’ll discuss this more next week, is that these trends also represent many of the innovations that will likely help the sector establish a more respected place with the world of global securities regulators.

 

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