3. What is ICO?

An inspiration to classic capital raising means?

Emerging Way of Fundraising on blockchain

  • Leveraging the power of decentralized technology, a new funding mechanism emerged. In 1H2017, over US$1.2billion is raised through this Initial Coin Offering (“ICO”)
  • Rather than a sale of securities, the object sold is a digital token or coin that is both scarce and validated based on advanced cryptography techniques. The are sold typically in exchange for major crypto-currencies, e.g. bitcoin or ether
  • ICOs are still largely unregulated to date, and it often remains unclear whether a token represents 1) a digital currency, 2) an utility token, or 3) a security
  • Similar cases could be found in virtual economies with real economic value, with video game gold farming as an example, but not on such a global scale
  • While tokens may offer functional value, speculation and volatility across the crypto economy are rampant, and fraudulent practices are not uncommon
  • Nonetheless, underneath the turbulent waters are seeds for a massive transformation of the real world. Prospectively, ICO can be established as an alternative to classic capital raising means

Total Funds Raised by month in 2017 (US$ mn)

Types of Coins could be Issued in an ICO

Digital Currency

  • The purpose of a coin is to serve as an alternative of fiat currencies and to facilitate an exchange in value
  • The design of the token focuses on technical performances, such as the speed of processing a transaction, security and degree of transparencies
  • With little intrinsic value due to their limited functionality beyond serving as an medium of exchange, their value is generally based on consensus
  • Examples: Bitcoin, Dash, Litecoin

Utility Token

  • The Token is used for a particular service or function on a blockchain-based platform
  • Developers can build in rules within the Token to serve some particular purposes. For example, Air Millage can be issued in a form of Tokens that will expire automatically
  • The value of the Token comes from the facilitation of the platform where they are used. Thus the higher the value of the platform, the higher the value of the Token
  • Examples: Ether, Filecoin, GEC

Security Token

  • A token may constitute a security coin if:
    • it confers or represents ownership interest in a corporation, represents liability of the token holder in the corporation, and represents mutual covenants with other token holders in the corporation inter se
    • it constitutes or evidences the indebtedness of the issuer of the digital token in respect of any money that is or may be lent to the issuer by a token holder
    • it represents a right or interest in a collective investment scheme, or an option to acquire a right or interest in such scheme

ICO vs Equity Investment

A token does not represent an ownership in the company

Equity Investment

  • Investors spend cash for an ownership of AppleX that operates AppStoreX
  • AppStoreX relies on fiat money supply to function
  • AppStoreX needs to share revenue with app publishers, pay for utilities such as data center and other operating cost, before returning the economic rewards to AppleX

ICO Investment

  • Investors spend cash for an ownership percentage of the AppleYCoin, which is the only acceptable token to pay for downloading apps
  • Built on blockchain, AppleYCoin enjoys the benefit of lower transaction cost between parties such as app publishers
  • AppleYCoin may be offered at a discount to outside investors before the whole AppStoreY is built, providing them an incentive to subscribe early