We passed on the opportunity to raise millions overnight1 when we decided not to add a LocalEthereum-branded token to the growing list of blockchain-based securities. It wasn’t an easy decision. We seriously considered it for a few months, and we even budgeted how we could best spend the hypothetical capital we’d raise, but in the end we decided “no, but thank you”.
Here are five reasons why we decided not to have an ICO:
We think that Ethereum is going to be around for a very long time, and we’re confident that LocalEthereum will too. The technology that makes Ethereum tick is truly awesome, and its applications are endless; decentralized virtual machines seriously have the potential to change how the world thinks about money, contracts and commerce in general.
That’s not an overstatement, and we’re not deranged: we predict that some time in this century cryptocurrency will become the world’s monetary norm, and until that day there is plenty of opportunity for LocalEthereum to capitalize on society’s global transition.
Considering the exponential growth in demand for ether, it’s not unrealistic to expect that more value will be generated from transaction fees over a long time than whatever amount we could have raised with an ICO. The commission on transactions, while only a small fraction (1%), will add up over time and LocalEthereum will get to keep 100% of it. (In a token scheme, a large portion of earnings would land in the token holders’ hands instead.)
We didn’t build LocalEthereum for its founders to make a quick buck. While money is not our primary motivation and we’d never compromise LocalEthereum’s values in order to make more of it, we’d be lying if we said we weren’t a little bit greedy: everybody is. We’re sitting on a unique opportunity to help create a global social impact while getting compensated, which is fantastic.
LocalEthereum has averaged more than 1,000 new signups every day since we opened for registrations last week. We’ve been mentioned in The New York Times and countless other publications, and we’ve been contacted in private by enthusiastic bloggers, professors, businessmen, activists and international news organizations.
Our advertising spend so far: a couple hundred dollars.
We mentioned earlier that we tried to figure out how we could best spend the hypothetical millions we’d raise with an ICO. We did, but here’s the unfortunate truth: a lot of the potential spending would be unnecessary and probably not worth it in the long run. We’re already reaching a massive audience by word of mouth and sheer untapped desire for what we’ve built — a secure and private OTC ether marketplace; there’s no need to blow money trying to attract people that were going to end up here organically anyway.
Suddenly having a huge budget to spend on LocalEthereum would only decrease the efficiency in how we spend our money. We could hire public relations specialists, a digital marketing team, office managers, UI/UX developers, human resources staff, copywriters, customer service representatives, data scientists, etc. right off the bat and open a HQ in each continent, but we don’t need all of that yet.
Having been early investors in both Ethereum and Bitcoin, we’re very comfortable with LocalEthereum’s financial situation and we’re confident that we don’t need to raise additional capital to get to where we want to go.
To say that raising funds via a token sale carries legal uncertainty is a huge understatement. A lot is going on right now as the world’s financial regulations try to get a grip on the ongoing ICO craze. Here’s a short recollection of events from the last month alone:
Sure, raising capital via token sales is an increasing trend for blockchain-related startups and could definitely be here to stay — who knows, it might even become the norm — but regulators are only just learning about them now. Whatever we think we know about regulations surrounding ICOs is probably going to change very soon.
Seeing month-old projects raise millions of dollars in minutes through an Initial Coin Offering makes it easy to forget how difficult and expensive an Initial Public Offering is. (For those that don’t know, an IPO is arguably an ICO’s conservative fiat-based equivalent.) The process of converting a private organization to a traditional public company is excruciating, typically reserved for late-stage $100M+ companies. It involves hundreds or thousands of pages of legalese, and a publicly circulated 100+ page prospectus that has been edited and reviewed by teams of well-paid lawyers.
An IPO requires an army of tax attorneys, lawyers and accountants on your side, and carries multi-million-dollar bills to external auditors, SEC counsel, stock exchanges and investor relations specialists. PwC estimates that companies spend more than $3.7 million in preparation for going public, and then another $1 million to restructure their organization after they become public. The process usually takes at least six months. Because of its tremendous cost and regulatory hurdles, announcing an IPO with only an idea on paper and no money in the bank is simply unheard of.
IPOs are fundamentally similar to ICOs except for two key differences:
Governments are only beginning to understand initial coin offerings and decide on how they should be regulated, and they have two basic choices: treat them like IPOs and extend the legal due diligence on IPOs to token offerings as well, or design brand new rules specifically for ICOs. If they decide on the former, then the token economy will likely take a dive, many good-faith developers will likely be charged with financial crimes and hundreds of millions of dollars will likely be returned to investors or burned on legal counsel.
We’d rather focus on building a great product than worry about treading unknown waters.
We are potentially in the midst of an ICO bubble. While we’re not making the case that we are in a bubble, we understand that we could be in one.
Here are some signs that a bubble might be forming in the token market:
When financial bubbles burst, money is lost, lives are ruined and people are hurt. In case we are indeed in a bubble that could crash any day now, we’d rather not contribute to it.
Many token creators try to make sure their token does not pass the “Howey Test”. For those that don’t know, the “Howey Test” refers to the criteria born from the landmark SEC v. W. J. Howey Co. (1946) Supreme Court case which determines whether an instrument is classified as an “investment contract” by law, and thus whether it falls under the jurisdiction of the U.S. Securities and Exchange Commission.
Under the Howey Test, a transaction is considered a statutory security if:
Obviously, token creators prefer to stay as far away from the SEC as possible, so significant efforts are made to ensure that their token will flunk the test. One creative idea to “beat” (i.e. fail) the test is to design a “utility token”. The basic idea is that if value is extracted primarily from the utility token’s consumptive use, then it would fail the fourth factor.
In theory, this sounds like a great way of avoiding regulatory scrutiny, but we tried it: we couldn’t think of a way to do it without overcomplicating our smart contract code and/or imposing a significant barrier to entry to our users — which is especially a problem for LocalEthereum since a significant portion of our users are brand new to Ethereum.
It wasn’t worth compromising on our product to avoid a questionable legal technicality and raise money that we don’t need.
(By the way, this isn’t legal advice — talk to an expert if you’re planning to hold a token sale.)
LocalEthereum allows trading of local currency to ether in a peer-to-peer, frictionless way.
Since we announced our launch 7 days ago, LocalEthereum has had more than 8,000 signups from more than eighty countries. We’re seeing a significant number of users come from mainland China, South Korea, Russia, Venezuela and the United States.
1 We estimate that we could have raised somewhere between US$5 million and US$75 million, depending on the month we held our token sale and the terms of our offering. Subject to the terms, at least some of the funds raised would inevitably end up in the hands of LocalEthereum’s founders by the way of equity and/or salary.
2 Subsequent cases have expanded this to include investments of assets other than money.