ICOs have gained popularity as a meaningful source of venture finance for startups across multiple industries. Although a revolutionary method of raising capital, many of the tokens issued in ICOs face the likelihood of being considered as securities by regulators, which might lead to retrospective investigations by the authorities concerned. This is regardless of disclaimers published in whitepapers and on websites declaring that the tokens are not financial instruments.
As a result of this, a new way of conducting ICOs has begun to emerge, which is expected fit token sales into regulatory frameworks. These are being called Reverse ICOs.
The Concept of Reverse ICOs
Reverse ICOs are identical to traditional IPOs, with the only difference being the issue of tokens in place of traditional stocks. These ICOs will follow the same regulations, disclosures and audits as traditional IPOs. Since they will be compliant with all laws, they are ideal for already established companies that have a solid track record of revenues and wish to either foray into the decentralised paradigm or raise additional capital for expansion purposes.
Tokens launched via Reverse ICOs are priced and issued directly to purchasers through the token sale website or via email-based sales. These tokens, in comparison to traditional stocks, are more liquid, have greater flexibility and are more open to innovation in the future.
The secondary trading is done by SEC-certified token exchanges like Overstock.com. These types of ICOs will be suitable for all crypto-investors who want to convert mainstream technology into cryptocurrencies but are wary of being caught up in litigation and penalties.
The current breed of ICOs might find it difficult to keep the SEC and other regulators at bay. Sooner or later, governments and financial institutions will regulate them. Reverse ICOs will also help squeeze scammers out of the system.
The Future of Token Sales
The concept of Reverse ICO has already been launched by the mobile messaging company, Kik. Realising the fact that Facebook will dominate the traditional messaging market, Kik launched its Reverse ICO in a span of two weeks in September 2017, where they aimed to compensate those adding value to the platform with Kik tokens. They managed to raise almost $100 million from the process.
With this concept, which will fulfill all regulatory compliances, tokens might not only serve as equity but also as a mode of payment in future. For established firms, tokens will add new investors and might increase sales figures as well.
We might also see new kinds of jobs being created in the market, particularly in law and enforcement agencies and consulting firms.
There is, of course, still miles to be covered here. There is a requirement for newer technologies and analysts to secure and accelerate the whole process. There are still a lot of uncertainties regarding fiduciary concepts, while the absence of any transfer restrictions or definite rules regarding taxation and accounting makes the idea risky, for now.
But if the issues can be sorted out, there is a good chance for companies like SoundCloud, Medium, Spotify and Uber to decentralise themselves, much to the consumer’s benefit.