October 28, 2022
Securing investment is often part and parcel of running a business, and for many, it’s the key component of developing a dream from seed to success. But in the boundary-pushing world of blockchain and crypto, does investment look a little bit different? While many blockchain businesses opt for the tried and tested investment route, some leverage particularly unique methods for securing funds. From coin offerings, to security tokens, we’ve outlined some of the interesting blockchain-based methods of raising funds – and how can you implement them in your fundraise. Let’s dive in...
When businesses reach a certain stage of development, they’ll often look for investment to fund further growth – whether that’s to secure key talent, invest in new technologies, purchase inventory or market key projects.
Crypto and blockchain businesses are no different. In fact, Web 3.0 companies seek backing now more than ever as adoption and interest grows rapidly in this space. The unique nature of these businesses’ offerings means there are a plethora of interesting options available to help raise that all important dollar.
That being said, more traditional methods definitely still have their place. Top blockchain businesses of 2022 raised investment predominantly through equity fundraising from both traditional and blockchain/crypto specific funders. Wintermute, an algorithmic market maker for digital assets, has secured £17.6m in equity investment so far. This spans across four funding rounds with a variety of investors, including the Rockaway Blockchain Fund who are “Backing the Web 3.0 founders shaping the ownership economy”.
Sector specific accelerators and government grants also have a significant part to play. For example, Elliptical, which develops cryptoasset compliance solutions for financial institutions, regulators and crypto businesses, (including Coinbase and Revolut) attended two accelerator programmes: Seedcamp and NCSC For Startups, successor to the NCSC’s Cyber Accelerator, and has since been awarded an Innovate UK grant (undisclosed sum).
Below, we’ve outlined some of the unique investment options blockchain and crypto companies might want to consider...
The equivalent of an initial public offering in the crypto world is an initial coin offering (ICO). This involves issuing a defined quantity of cryptographic assets (e.g. digital tokens/coins) in return for legal tender (i.e. fiat currency, such as the USD or Euro). Undertaking an ICO properly is serious business, from whitepaper drafting and project marketing to token/coin sale and of course regulatory review.
Historically there has been a bit of bad press around the uncertainty and high failure rate of ICOs. Fortunately, investors have found in more recent years that the risk is worth taking, and that ICOs, in general, are a genuine fundraising tool. Indeed, some of the world’s biggest crypto and blockchain projects around today have ICOs to thank for their booming business (including Ethereum!). Tezos Foundation, based in Switzerland, raised $232m from its July 2017 ICO for a smart contract platform designed to power online digital economies.
Interestingly, ICOs led to the birth of several other crypto-specific investment methods including Initial Exchange Offerings (IEOs), Initial DEX Offerings (IDOs) and Security Token Offerings (STOs) (we eat acronyms for breakfast here – can you tell?!)
Initial exchange offerings (IEOs) are similar to ICOs, except that the entire token issuance happens through a selected cryptocurrency exchange. Token/coin issuance can be in exchange for fiat currency or crypto (for example, Ether). IEOs tend to be a ‘win’ for the business, as well-known and reputable exchanges can attract far more investors. Exchanges like Binance and Coinbase will rigorously assess tokens/coins before allowing any issue through their platforms and whilst they can’t ensure the validity or success of a given token/coin, they’ll most likely have stringent vetting procedures in place, helping investors to feel more secure. The downside is they’ll also often charge blockchain businesses hefty fees to manage the tokens/coins directly.
Initial DEX offerings (IDOs) differ to ICOs by fundraising occurring through a decentralised exchange platform, rather by the blockchain business itself. These exchanges rely on smart contracts and an underlying blockchain to execute fund transfers and function as automated market makers.
Many of the advantages of IEOs equally apply to IDOs. Additionally, when compared to ICOs, IDOs generally offer blockchain businesses a quicker and more affordable way to distribute their tokens/coins and raise investment whilst providing a higher level of security. Indeed, many blockchain businesses have had huge success raising investment through IDOs. For example, Battle Infinity obtained a 700% gain in presale price through its IDO.
Security token offerings (STOs) are often touted as a less popular method for raising investment, due to businesses recognising the token as a security from the outset. In England and Wales, dealing with and promoting security tokens requires authorisation from the Financial Conduct Authority (the UK’s financial regulatory body). Depending on the jurisdiction, issuing securities may also engage anti-money laundering rules, adding an extra administrative and regulatory burden.
Don’t be pulling your hair out over this stuff – our team of FinReg experts are here to help you navigate the regulatory minefields.
In our experience, businesses considering any sort of token offering are best placed starting with a comprehensive, multi-jurisdictional analysis on whether their token is likely to constitute a security. Whilst we can only advise on the laws of England and Wales, we can provide useful insights and guidance on the approach being taken internationally and connect our clients with our network of advisers so that they can make an informed decision.
Stephenson Law’s emerging technology team has extensive experience in token regulation and all things raising investment for Web 3.0 and blockchain businesses. If you are considering the ICO, IEOs, IDO or STO, then please get in touch.