Around the time of the Mortgage Crisis, Howard Marks wrote a memo called “Now It’s All Bad?”
The point is — usually the market loves everything, or hates everything.
And now, everyone hates ICO’s. Crypto bears hate ICO’s. Crypto bulls hate ICO’s. Newly minted “Bitcoin maximalists” (‘hey, everyone I follow on Twitter!) hate ICO’s. And regulators probably hate ICO’s…
But I don’t think all token offerings are bad.
Token offerings are good in at least two simple scenarios:
The first scenario is as follows:
Management needs a mechanism to incentivize a community of people, who are not employees of the business, to do work that in aggregate creates value. (examples: (a) a community of people who can contribute accurate, disparate information that would be otherwise hard for a single, central party to gather (think Wikipedia) or (b) contribute intellectual work to an open source project (think Ethereum).
When issuing a Token, you should ask yourself: would doing so incentivize a community to do something I want them to do? And would the community later be able to reap the rewards of others using the thing they just built, by taxing them in the Tokens I am offering?
If the answer is yes, it’s maybe worth exploring. If the answer is “no,” it’s probably not worth exploring.
The second scenario is as follows:
Management feels that an investor base exists, that would be willing to purchase Security Tokens at an attractive price relative to their reduced rights and economic privileges.
Example: some investors may be willing to buy a share of Common Stock at $1.00. But a Security Token at $1.05. Why? Because they’d prefer the liquidity mechanics of the Security Token over the senior economic and governance rights of the Common Stock.
These investors may be willing to purchase these Security Tokens, because they believe the notoriety of the company might happen earlier than the liquidity of the more traditional shares. And such notoriety may ultimately create a liquid, or semi-liquid market they could sell into later.
Neither of these reasons are novel, but they represent that not all ICO’s or STO’s are bad.