NOTE: see Postscript at bottom for update on 6.4.17.
Increasingly over the past 2 years, several start-up companies are obtaining capital via something known as an ICO (Initial Coin Offering). ICO’s essentially combine crowd-sourcing with blockchain technology. Here’s how an ICO works: suppose a start-up (say ACME Blockbuster) wants to raise money for development of it’s product or service (whatever that happens to be). ACME can short-circuit the long, arduous task of getting funds from Venture Capitalists by simply announcing that in – say 30 days – it will issue “coins” to the public at an initial offering price of $X dollars or $Y Bitcoin. ACME offers some information about what it plans to do with the funds raised usually via a “white paper” on its website, and also gives other details such as how many ACME coins the company plans to offer to the public and how many coins ACME will retain. But one key point: this is basically an initial public offering without virtually any government oversight – including none of the normal SEC filings an IPO would entail.
The “ACME coins” are really tokens on a blockchain (e.g. Ethereum, Bitcoin). In our example, the investors would buy ACME tokens using fiat money (e.g. US dollars) or crypto-currency (e.g. Ethereum Ether, Bitcoins) at ACME’s initial offering price. The “ICO industry” already has some service companies sprouting up – such as ICOO, to improve the liquidity of these tokens.
Now, your “ACME tokens” are kind of like shares in a company – but it is a little hazy as to what your ‘token holder’ rights are. You are basically in the game to speculate: if ACME starts getting results in whatever product/service it is offering- the tokens will fetch higher dollar or Bitcoin prices. But don’t expect “stockolder meetings” or SEC filings or anything like that. Interestingly, however, there is an ICO ratings organization already in place.
POSTSCRIPT 6.4.17: a couple of recent articles in the Financial Times are must read items prior to investing in any ICO’s or “distributed autonomous organizations (DAOs: which FT likens to automated Ponzi schemes). Bottom line: unless you are one of the few people that really understand both blockchain technology at an organic level – and the contracts these ICO’s are pro-offering, (or you have money to burn) – stay away!