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Should you consider an equity token?

December 25, 2017

Table of content:

Why you should be considering an equity token

Because you’re a traditional centralized business. And you don’t want to get in trouble next year.

At this point, we are getting 3 to 5 ICO whitepaper inquiries per day. Even on Sundays. And Christmas. Everybody seems to need an ICO whitepaper. The problem is that most people don’t need a token. That’s why equity tokens are gaining in popularity.

Here’s why you should be considering equity tokens:

  • For businesses where you want to take profits, equity is the natural and straightforward way to share that success with people who invest in your company.
  • Equity tokens are the most proven token economy in the world. The traditional name for such things is “stocks” or “shares”.
  • It’s possible to issue tokens as a non-voting share, so you don’t give out control of your company, but you do allow people to invest safely.
  • If you go through the equity crowdfunding model (according to your local regulator’s rules), you will remain safe and calm a year from now when your local regulator starts going after tokens that pretended they weren’t selling a security but actually were.
  • Your tokens will retain value as long as your company is making money.
  • Today, most ICOs are raising most of their money on pre-ICO rounds, not on the public ICO, which means you are (a) talking to professional investors and (b) talking to people who do not need the utility your token would theoretically provide. It should be obvious why a professional investor wants equity, not a token to buy something they don’t need.
  • Your company won’t have to function as a central bank to stabilize your token’s value, nor will you need to incentivize use of the token or discount it at any time. It’s a form of share in your company.
  • You can accept investors from any jurisdiction.
  • You won’t have a long conversation on your team about tokenomics. You won’t have to twist your logic with investors about how they are going to see their ROI. You won’t have to develop a token economy or a way to accept utility tokens.
  • You will align your investors interests and your own.

In short, it’s the honest way to do an ICO for a business focused on making money in the current configuration of the money world. If you are planning to run the company like a private company and you want private investors to put their private money in your private company, don’t pretend it is a decentralized organization that needs a token. Just be honest.

But we don’t want to be classified as a security!

Oh, that’s easy. If you don’t want to be classified as a security, don’t raise funds from investors. Raise funds from users. Kickstarter and Indiegogo let you do that. Eventbrite lets you do that. And some blockchain companies do that. Almost all of of the companies in the blockchain space that have done that are in the blockchain infrastructure domain, in fact. Filecoin, Bancor, Steem, TenX… they don’t seem to worry about the supply of their token or whether it will have “real” value. They are just doing their thing in the blockchain space and figuring that people who need their service will hold their tokens.

None of them are regular-companies-turned blockchain. You know why? Because it doesn’t really work. You know this. You know you have been figuring out your token model and in the end, you are still functioning as a central bank. My next blog will feature a parable about a central bank, in case you don’t know what I mean by that.

Advantages over traditional fundraising

The main advantage of ICO fundraising over traditional rounds is that, right now, you can get better terms as a founder. Investors in ICOs aren’t asking for voting rights or a board position, and they can invest in a variety of increments that wouldn’t be possible in traditional investment fundraising. Also, probably most importantly, ICOs are hot and more institutional investors are looking into ICOs, so for the time being, you are probably going to fare better by offering an equity ICO than offering equity on private markets.

But don’t be naive. This isn’t going to be easy. You are still going to spend months on a roadshow getting your investors. You are probably going to spend a lot more money on this than a traditional roadshow. You are going to have to be just as polished as a traditional fundraising round, and you are going to need some fairly complex financial structures for collecting funds and issuing tokens and getting listed on some kind of exchange or managing wallets in some way.

Having said that, still, I think ICOs still give you better leverage than traditional fundraising. Today. Given that it will take you 6-18 months to get this thing together, we can’t predict that your timing will work for you. There will be an “adjustment” and nobody knows when that will be.

Get a lawyer

Get a lawyer. You will need to comply with securities law in your jurisdiction. We write ICO whitepapers. We aren’t lawyers. But we work with a lot of companies with lawyers and these are the models we’re seeing in the ICO whitepapers we write.

Types of equity token

Now that you realize that you really want to share your success with your investors, there are many ways to do so:

  • Royalty payments. Royalties are paid as a percentage of income, rather than a percentage of profits. In many jurisdictions, this is not considered a security.
  • Buybacks or buyouts. Typically, this also includes some kind of interest payment or possibly dividends before the buyout. In some ways, this is like a loan or a corporate bond. You are saying: I need some cash to build a business, and I’ll buy the tokens back from you, based on some formula we agree upon up front.
  • Dividends or percentage of profits. Basically, this is a stock. Smartcontracts might allow you more flexibility in how you set up the dividends, but that’s what this is.
  • Straight equity. The token represents a percentage of the company and goes up and down in value according to the company’s value. Again, this is basically a stock, but unlike a stock, it may not give you voting rights in the company

Obviously, you can mix and match these models. We’ve seen a variety of different ways for companies looking to do equity ICOs. We don’t have any evidence yet of how the regulators will look at this, or what they will look like when they hit the market. Because of our position as ICO writers, we are seeing trends six months before they hit the markets. We can’t guarantee that anyone will succeed in this kind of model, but this is what we’re seeing and reporting to you.