Why Do ICOs Need Global Investors?

How many people are able to conduct their financial affairs outside of their borders? It’s an interesting question, and one with significant ramifications for those interested in the process of innovation and entrepreneurship.

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How many people are able to conduct their financial affairs outside of their borders?

It’s an interesting question, and one with significant ramifications for those interested in the process of innovation and entrepreneurship.

Typically, finance is a rather shielded business. The industry has largely been formed around the axis of nations states, all of which have their own central banks, currencies, regulatory and legal systems, and ways, which they deem to be correct, of doing business.

This tight control extends deeply into the world of venture investing, with the types of people allowed to take a stake in a business often prescribed by the authorities, leaving entrepreneurs with a relatively thin segment of society from which they can raise capital to fund their ideas.

That dynamic works very much in favor of investors within the inner circle, who are allowed to pick and choose their investments from the pack which is forced into their arms by their governing bodies.

They can do this on favorable terms, which allow them to take large chunks of control in ventures at often discounted rates.

With the rise of cryptocurrencies, and subsequently the token and ICO markets, that relationship has changed.

Now, venture financing has suddenly become a global game, one that is not restricted to investors with a government-approved license, but to anyone who is interested or supportive of a burgeoning business from a financial, societal or moral perspective.

For investors, this presents an opportunity to retain control over their business while tapping into a wider pool of capital and investors.

But that opportunity is daunting. While tokens have opened up this marketplace, it is a crowded space, and many of these projects operating on blockchains rely on having a global network to run effectively.

So why is it so important for investors to have a global network when considering an ICO or Token Generation Event (TGE)?

Network Effects

TLDR’s Andrew Durgee reckons that since the technical basis of many token-backed projects requires a range of supporting nodes, it is essential that the platforms are not restricted to one single jurisdiction or market.

Durgee has been part of token projects and the cryptocurrency world since 2010, participating in blockchain projects including an industry first multi-signature wallet repository, and believes that having a global footprint and partners around the world is a necessity for any venture’s success.

Regardless of the regulatory environment in which they operate, issuers and investors want to make sure that the adoption of these platforms is global and that the nodes are global - because the usage of the tokens themselves is going to be global,” he says.

Martin Adams, TLDR Partner, agrees that one of the key strengths of ICOs compared to traditional fundraising mechanisms is their creation of a global network of ready participants prior to platform launch.

One of the key benefits of an ICO over traditional fundraising mechanisms is that you have pre-sold a wide global network of potential users of your token.

So the classic divide between (1) fundraising and then (2) going to market is collapsed. The result is that good projects emerge from their TGEs with huge amounts of latent energy: many of the users, partners, and developers their product will rely on for success are likely to already be invested in their success- that’s powerful.

Moreover, separating your project from the rest of the herd is a paramount reason to make sure that it is based on an international footing.

Durgee notes that as the ICO market has grown in size it has become harder for founders to get their message heard in traditional markets, making it vital to have a global network underpinning the offering.

By having a global footprint the overall value of the project will scale significantly faster,” he says. “Being at international conferences, networking with multinational thought leaders, and building a world brand are all accelerators to the valuation. Blockchain has no borders and neither should an ICO.

Regulatory Prompts

With the uncertain nature of the regulatory environment for token projects, however, it is a topic that is subject to intensive debate both within the industry and from the broader financial and legal professions.

The US Securities and Exchange Commission has, as of mid-2018, declined to give a hard and fast definition of what it considers the legal status of many tokens to be despite raising concerns about fraud in the market, while other regulators from Singapore to Malta have taken a more proactive approach, encouraging investors and issuers to consider their jurisdictions as a friendlier alternative.

TLDR’s Alex Yamashita points to the flawed approach of regulators to the market as a major reason for the lack of clear direction from many local authorities.

He says that governing bodies are using the same barometers for ICOs and token projects as they do for traditional financial markets, which he says is like comparing email to the postal service- they have similar functions, but are entirely different beasts.

But he adds that US market participants, as well as the country’s regulator, need to understand the global nature of the token marketplace.

A global point of view is necessary because this is a global industry. From the issuer perspective, it is really about the willingness of founders and them traveling around and meeting people to understand their point of view,” Yamashita says.

Non-US teams typically have an easier time of doing this, while US teams feel that all they need is already in their home turf. These are the ones who need the pointers and to understand the cultural nuances of doing business in different countries.

Diversification

Durgee similarly highlights that from a founder perspective, it is unhelpful to be at the mercy of a single country’s politics or regulatory environment.

He argues that blockchain was designed with a global user base in mind and that projects which lack a global presence leave themselves more vulnerable than those with international users and investors.

Community building continues to prove itself as a key component to a successful ICO. The wider that one’s reach is, the greater the network effect,” Durgee says.

Global buy-in not only supports the network growth but also ensures the utility usage of the token is properly distributed. Let’s say you launch an ICO in Country A and only market that ICO in Country A, you are now at the mercy of Country A and their politics. This is not how blockchain was intended.

The TLDR Recap

  1. TGEs are about liquidity.
  2. Having a global investor community helps to improve the tradeable nature of the tokens.
  3. You need to have a global foundation for greater access and utility to ensure platforms have an international user base prior to launch.
  4. Crypto and blockchain are fundamentally global.
  5. Without an international base, ICOs and other token projects are susceptible to the whims of individual regulatory environments.

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This article is based on views and information held by TLDR on publication date and may be subject to change, although TLDR does not undertake to update them. Nothing contained herein constitutes investment, legal, tax or other advice, nor a recommendation or solicitation of an offer to buy or sell any securities or to adopt any investment strategy. No representation or warranty, express or implied, is made or given by or on behalf of TLDR as to the accuracy and completeness or fairness of the information contained in this article.