On March 6, 2018 in New York City, I had the privilege of moderating a provocative and informative panel at law firm Sullivan & Worcester, exploring the benefits of next-generation Token Asset Offerings (TAOs). The focus of the event was to highlight, compare and contrast TAOs against the current wave of "traditional" Initial Coin Offerings (ICOs). It featured Igor Telnatyikov (co-founder and COO of AlphaPoint), Joel Telpner, Esq. (noted blockchain regulatory expert), and Tom Zaccagnino (founder and Managing Director of Real Estate Private Equity firm Muirfield Investment Partners).
The recent ICO boom has attracted approximately $6bn in investment in 2017 alone, with projections of nearly $8bn for 2018. However, some estimates have the failure rate of these new investment vehicles as high as 59%. Bitcoin.com figures a bit more conservatively, estimating the ICO failure rate at around 46%. Even Ethereum founder and cult icon Vitalik Buterin warned investors to "Beware Of ICO Scams" in a Fortune Magazine article last month.
At the heart of many of these failures is a lack of accountability and responsibility on the part of the startups, and a dearth of understanding of the blockchain space on the part of regulators. Separating outright scams from the equation, these two factors alone create a field that is ripe for misunderstanding, law-bending and outright blunders form inexperience.
... offer enhanced safety for investors and accountability for the issuing firm."
- Tom Zaccagnino, Muirfield Investment Partners
Joel Telpner of Sullivan & Worcester, summed up the current ICO regulatory environment as “... a minefield. The regulations applicable to ICOs are extremely complex and still evolving. Too many ICOs have been issued under the assumption that existing securities regulations don’t apply. While that may be true in some cases, the SEC believes that many of the ICOs that have taken place in recent months are actually securities and, as a result, those ICOs failed to properly comply with U.S. securities laws.”
New TAO entrant Tom Zaccagnino of Muirfield further made the case fo TAOs over ICOs, noting noting that, "TAOs generate tokens as secure assets, voluntarily compliant with existing SEC regulations. They offer enhanced safety for investors, and accountability of the issuing firm." And Tom isn’t just talking — Muirfield is slated to launch it's own much-anticipated Tokenized Real Estate PE Fund in Q2 this year.
MY TAKEAWAY: It’s important to remember that most ICO deals are offered by startups, and while blockchain fundraises may lower barriers for entry for smaller investors and democratize access to deals, they also come with elevated risks. Traditionally, VCs have borne the brunt of startup failures in order to have a few good hits, but VCs are not as relevant today as they were in fueling the Dotcom boom, individual investors are increasingly the recipients of that exposure. Even so, a 60% fail rate for tech startups is actually pretty good, For decades, VCs have been used to much higher rates of startup failures. As we learn together (along with the SEC and other regulators) what the more successful efforts look like this year, including the rise in accountability offered by of TAOs, success rates could increase markedly.
With this said, we still need a new taxonomy to describe and regulate the overall token ecosystem and the varied nature of digital assets. As Telpner noted, the space is certainly evolving. But for now, TAOs may provide the best assurance of accountability and investor protection.