Buyer beware: ICOs are not synonymous with utility tokens even though many firms doing ICOs claim their tokens are utility tokens and not securities.
There are many fundamental problems with the concepts of both “initial coin offerings” and “utility tokens” including the fact that many ICO tokens have no direct link to the financial success of the issuing company and retail investors do not often understanding what the token represents. Also, ICOs that actually offer investment contracts but do not comply with security regulations such as having their prospectus approved by financial market authorities or filing for an exemption are actually illegal security offerings. Regarding the theoretical problem with utility tokens, currency risk in the purchasing power of the token makes it unsuitable for many of the applications that it is designed for.
Sole proprietorships make up 72% of U.S. firms but only account for 4% of revenue while corporations make up 18% of firms but account for 83% of revenue. One reason for this is that the shares of corporations are easy to trade. Unlike a sole proprietorship, partnership, or LLC, anyone can be a shareholder of a corporation without any knowledge or expertise of the company they are running. This enables corporations to raise substantial amounts of money on capital markets.
Crowdfunding, private equity, initial coin offerings (ICOs), and security token offerings (STOs) are just some of the ways investors are providing capital to small and medium-size enterprises (SMEs). Although the concept of crowdfunding goes back to 18th century book sales, the modern conception of crowdfunding is an internet phenomenon. Crowdfunding typically refers to entrepreneurs raising small amounts of capital from a large pool of investors online.
There are several types of crowdfunding but the two relevant are donation-based fundraising and equity.
Donation-based equity crowdfunding is where investors give or “donate” capital to a startup in exchange for a future good or service or just to support the idea. Popular sites for donation-based crowdfunding include Kickstarter that has raised over $3.7 billion and Indiegogo, which has raised over $1 billion. In contrast, equity crowdfunding is the crowd-sale of securities such as equity, debt, membership units, and convertible units. Equity crowdfunding has raised approximately $500 million since its inception in the U.S. in 2015.