More than $3.3 billion in funding has now been raised via initial coin offerings (ICOs), according to CoinDesk. That figure was just $200 million at this time one year ago.
In an ICO (or “token sale”), a startup (one that usually has digital currency or blockchain at its core) sells its own digital tokens, for later use in their ecosystem, in exchange for existing digital currencies like bitcoin or ether. There is no guarantee the token will accrue value, and the buyers of the tokens get no real equity in the company. The tokens are not really akin to stock, though many have compared ICOs to IPOs.
In ICOs, these companies see a fast way to raise (an often obscene amount of) capital, and investors see an instant entry into the crypto world for people who, in many cases, think they missed out already on bitcoin and may be kicking themselves.
But ICOs are extremely risky, and many are likely fraudulent. Most of the companies doing token sales have not yet launched a product, but simply put out a white paper on what they intend to launch.
CoinList wants to change that.
The company, which spun out from AngelList last month, is a compliance-focused services provider for token sales. It lists ICOs, but only for companies it has thoroughly vetted, and it’s also selling a back-end, white label compliance service.
“We’re being very picky” with ICOs
The first part of the business is investor-facing: think of CoinList as a highly selective Nasdaq for ICOs. So far, it has listed just two: Filecoin, which raised $205 million in August, most of it in the first hour; and Blockstack, formerly called OneName, which opened up its token sale on Nov. 1.
For those token sales, CoinList says it did extensive due diligence before launching the sale. Then it launched the token sales on its own site, so investors bought the tokens through CoinList, paying in US dollars, bitcoin or ether.
The second part of the business is purely a B2B play: CoinList could provide compliance checks and services to companies looking to IPO without listing their ICO on CoinList.
“We’re being very picky and we have a really strict diligence process,” says CoinList CEO Andy Bromberg. “We’re looking for a history of shipping product: that these companies actually know how to build things, and they’re not going to do a white paper and then struggle to actually build anything.”
Bromberg, 23, was a founding member of the Stanford Bitcoin Group. His professor there was Balaji Srinivasan, a board partner at Andreessen Horowitz and the founder of 21.co, which rebranded this month to Earn.com and has raised an eye-popping $121 million.
What qualifies a company as having “shipped product?” In the case of Filecoin, the first token sale CoinList offered, Filecoin’s parent company Protocol Labs had built the IPFS (Interplanetary File System), a peer-to-peer media and storage protocol. IPFS is being used as the storage layer under Filecoin. “So they’ve shipped product that is being used in their new product,” Bromberg says, “and that makes us much more comfortable that they will deliver on their promises.”
What does CoinList’s diligence process entail? It handles KYC (know your customer), AML (anti-money laundering), and investor accreditation.
That last part is what most affects you, a person who might wish to buy into a token sale. CoinList’s accreditation process only allows buyers with $200,000 in annual salary or a net worth of $1 million to buy in. That’s the same bar AngelList sets on its site. (Investors who don’t clear that bar can still buy into the Blockstack ICO on blockstack.com.)
The high income bar is about helping achieve seriousness and safety.
“We want to add safety, and more broadly, compliance,” says Bromberg. “One of the scariest things to us right now is there are things happening in the space that might not be totally compliant.
Of course, buying into an ICO will never be completely safe. As venture capitalist Tim Draper said on a panel at Web Summit 2017 this month, “Safety is not in the ICO vocabulary.”
But Bromberg counters: “If you’re venturing out into the Wild West of ICOs, then absolutely, safety is not there. If you’re looking for products that have value, for teams that have shipped product, with actual backers behind them, selfishly we would say CoinList is the place to find that. If it’s on CoinList, it’s gone through an extensive vetting process. Now, is it a guaranteed investment? No, of course not. But you at least know these projects have been vetted by teams of experts.”
ICOs and IPOs are “an unfortunate comparison”
Bromberg adds that it’s best for prospective investors not to think of a token sale as akin to buying stock in an initial public offering. “I think that’s an unfortunate comparison, because they happen at totally different stages of the company,” he says. “ICOs are often very early in the company or at the mid-stage, IPOs obviously at the late stage. That said, I would like to get closer to the IPO model, with detailed diligence requirements and making sure they’re disclosing things to the public.”
The bottom line amidst the ICO explosion remains: You should buy in only if you believe in the company offering the token. (Ethereum cofounder Joe Lubin made the same point at Web Summit 2017.) “There are a lot of speculators in the market, and a lot of these tokens will go up in value, but that’s a separate game, and most people should invest only if they believe in the company and its mission,” says Bromberg. “People should be buying these things if they plan to use the utility of these tokens.
Disclosure: The author owns less than 1 bitcoin, purchased in 2015 for reporting purposes.
Daniel Roberts covers bitcoin and blockchain at Yahoo Finance. Follow him on Twitter at @readDanwrite.