Initial coin offerings (ICOs) are the order of the day for most businesses nowadays. When it comes to raising investment for a startup business, the number one route is to make use of an ICO.
They work via a simple mechanism. During an ICO, a startup sells its tokens to investors from all over the world. These tokens are sold at meager prices, a factor that attracts investors from all around the world.
The end game for investors in ICOs is to sell tokens in the future for a profit. Of course, this is only possible if the startup business ends up being successful in the long run.
The very first ICO was dreamed up and actualized by Mastercoin. Soon after, Ethereum made headlines after making millions of dollars in the first 12 hours of its initial coin offering. Today, Ethereum is one of the world’s top cryptocurrencies with early investors in its ICO garnering a return on investment of over 1,000%.
Unfortunately, many people view ICOs as a scam. Their opinion may be wrong, but they are not entirely unjustified. According to Ernst and Young, a professional services firm, more than 9% of the funds raised during ICOs are lost due to fraud or hacker attacks.
A considerable percentage of startups that participate in ICOs fail. Even the ones that succeed like Tezos invariably fall short of one regulatory law or the other, and Btxchange.io reports that Tezos is currently battling a lawsuit for apparent securities fraud.
It is clear that the whole ICO system needs to be revamped for the better. As of now, they are unregulated and investors have no control over their investments. That doesn’t mean we can’t postulate alternative ways of distributing funds garnered via ICOs.
Alternative Ways Of Handling ICO Investments
The first thought that comes to mind is to regulate how startups spend investments gathered from ICOs. Just like IPOs where investors have a share of the company and a say, the same model could be introduced to ICOs. That way, investors can control and make sure their hard earned money isn’t being spent haphazardly.
Another alternative model is to introduce clauses that regulate how a business is afforded access to funds raised via ICOs. When embarking on an ICO, it is customary for a company to provide the general public with business plans. These plans are usually broken down into stages; each stage with its peculiar milestones.
Essentially, clauses can be introduced to ICOs that permanently lock out a pre-arranged percentage of funds raised during an ICO until the startup business completes a stage of the business plan. As the business thrives and achieves its goals via a step-by-step process, funds can be made available progressively.
Lastly, smart contracts can be utilized to actively control the distribution and availability of funds. A smart contract refers to a computer code that simplifies and streamlines the execution of a certain agreement. With smart contracts, the services of a third party are extinct.
Smart contracts execute what is written into its codes when specific criteria are met. This singular feature can be used actively to control how ICO funds are used. Clauses can be inserted into a contract to control what projects money can be spent on, how much can be spent, and in what capacity. This way, startups and investors can co-exist with transparency and honesty.