Indiegogo Goes Where Few Companies Dare: Into Initial Coin Offerings

Programmers, entrepreneurs and scammers have raised over $3.5 billion through coin offerings this year, according to Coindesk, after rising out of almost nowhere. That is more than the best-known company in crowdfunding, Kickstarter, has helped companies raise in its entire eight-year history.

Initial coin offerings have been so hot — and some say so unhinged — that some companies have found success with them even after failed crowdfunding campaigns. An online art gallery known as Maecenas, which failed to raise 400,000 pounds (currently about $533,000) through crowdfunding this year, raised $15 million a few months later through an I.C.O., the Financial Times has reported.

The New York Times Explains…

Established companies have been left out of the I.C.O. craze, in large part because of the legal uncertainty.

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The Manhattan offices of Indiegogo, which found it increasingly hard to ignore the initial coin offering market.

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Roger Kisby for The New York Times

The head of the Securities and Exchange Commission, Jay Clayton, has said several times — most recently on Monday — that many coins should be categorized as securities and be registered with the authorities, which almost no projects have done. The agency has recently cracked down on a number of projects that aren’t legally compliant.

Indiegogo will help coin offerings follow the law by registering them as securities in most cases. This approach puts many restrictions on investors and on projects.

Small investors will be allowed to invest about $10,000 in most projects, and companies will be able to raise no more than $1 million from these investors, because of restrictions put in place by the 2012 JOBS Act. That is a tiny amount compared with the tens of millions of dollars that many coin offerings have raised this year.

Projects going through Indiegogo will be able to raise more money from sophisticated investors. But these investors will also face limitations, such as lockup periods, before they begin selling their tokens to others.

These restrictions could make the new service unattractive. Most coin offerings have been able to garner unlimited amounts of money from any investor; the biggest have raised over $200 million. And at least so far, regulators have cracked down on few of them.

Several law firms have already been working on creating legally compliant methods of initial coin offerings. Indiegogo is working with one of those firms, Cooley.

Sohrob Farudi, the chief executive of the Fan-Controlled Football League, said he was willing to accept the restrictions involved in working with Indiegogo to stay on the right side of the law.

“We want to be sure that nobody on our side is going to jail and that when we bring this product to market that it will be done the right way,” Mr. Farudi said.

His group previously raised $63,000 in an Indiegogo campaign to create a minor-league football team guided by fans. Now it is hoping to create a full league with the same principles.

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The head of the Securities and Exchange Commission, Jay Clayton, has said many coins should be categorized as securities and be registered with the authorities.

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Pablo Martinez Monsivais/Associated Press

The league will begin this week with what is known as a token presale. Early next year, it expects to do a full initial coin offering, and will likely look to raise around $30 million, Mr. Farudi said. At that point, the people who invested in the presale will receive coins, also referred to as tokens, at a discounted rate.

When the league opens next summer, people who hold the tokens will be able to vote on everything, from what color the jerseys should be to what plays the coaches should call during a game, with votes taken in real time.

The tokens will initially be stored and recorded on the ledger, or blockchain, associated with the Ethereum virtual currency network, though recent congestion on the Ethereum system has the league looking at other blockchain alternatives for the long term.

Mr. Farudi said having the tokens on a virtual currency blockchain would allow every vote to be recorded for all the participants to see.

“The voting mechanism has to be transparent,” he said. “The blockchain is the best example we could find for how to implement that.”

When the league does its I.C.O., Indiegogo plans to categorize it as a so-called utility token, rather than a security, because its main purpose will be to allow for voting on league decisions. Utility tokens come with fewer restrictions than securities.

Mr. Rubin of Indiegogo said most companies doing coin offerings would probably have to register as securities. For now, he thinks that coin offerings won’t make sense for most companies, given the additional complications.

In the long run, though, he has joined the chorus of believers who think that all investments are likely to be done on some sort of blockchain because of the way it allows decisions and changes of ownership to be recorded transparently.

“Over time, I don’t think it’s going to be a discussion — I think all of it will be on a blockchain infrastructure,” Mr. Rubin said. “The New York Stock Exchange, or the Nasdaq, 20 years from now will be on blockchain. That’s what we’re talking about.”

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