A Comprehensive View: ICOs, IEOs, STOs, and Equity Raises
Smith + Crown is releasing the first global look at blockchain funding. This set of data shows how much money is flowing into the industry via various capital raise structures, including:
- Equity Funding for blockchain startups
- Initial Coin Offerings (ICOs) / Open Token Sales, drawing from our extensive and quoted database of public and quasi-public token sales
- Initial Exchange Offerings (IEOs), which greatly resemble ICOs but are called out separately due to some unique characteristics discussed below
- Sales of coins involving SAFT-like instruments, which resemble private venture funding but involve the issuance of tokens instead of equity
- Security Token Offerings (STOs), which involve the sale of a self-avowed security instrument intended to remain a security throughout its lifetime
Taken together, these numbers are a gauge of global capital interest in the future of blockchain technology. Each such transaction has involved the transfer of money from one party to another in anticipation of future blockchain-related work. In the case of equity, this revealed a belief among funders that a blockchain-powered product or service could be profitable, or that companies supporting the emerging blockchain and cryptoasset industry could be profitable. Most certainly, much token sale activity reflected a similar mindset among participants, though as Smith + Crown have argued elsewhere, there was more to the practice of ICOs than projects raising capital with less regulatory scrutiny. All these funding methods wager on the industry’s future.
Producing such a global look requires making certain decisions regarding the inclusion, exclusion, and classification of fundraising activities. As a research organization, Smith + Crown takes such decisions seriously, and offers a methods section for a rich discussion of our approach and some of the tradeoffs we navigate, including: how funds from asset trading are treated, the sale of native assets into active markets, treatment of airdrops and lockups, among other cases.
A Historical Look at Project Funding
The graph above quantifies global interest in funding blockchain companies, protocols, and solutions. It clearly shows the rise in token-sale-based funding in early 2017, coinciding with the bull run that brought Bitcoin to $20,000 and Ethereum above $1,400. Token-based funding slowed out as the reality of ‘Crypto Winter’ set in, but equity funding (in terms of dollars raised) actually increased during this period. This increase likely reflected several dynamics:
- Many ICO-bound projects aborted plans for a token sale and sought equity instead.
- A growing, shared sentiment that, as Jamie Dimon put it in early 2018, “blockchain is real.”
- A need for follow-on funding for companies that had fueled and benefited from the preceding period of excess. Bitmain, Coinbase, Bithumb, Circle, and Robinhood (which is funding its expansion into crypto) all had major equity rounds in 2018.
After a long decline in 2018, token-based funding picked up pace in 2019, raising more money each month, mostly under the guise of IEOs, discussed below. The data identify ‘ICOs’ among all token sales as those which did not use a SAFT instrument, had some degree of public participation, and were not issued on an exchange platform in the form of an IEO-style token sale. This is admittedly a catch-all category that includes a variety of different token-sale structures that will be identified and disaggregated in more fine-grained discussions of the evolution of token sales.
Data on the SAFT instrument, likewise expected to gain momentum, supports a different narrative. Over 70 companies employed this structure to raise funds in 2017 and 2018, and the SAFT was heralded by lawyer Marco Santori and law firm Cooley as a legally compliant method of selling tokens under a securities exemption. The practice subsequently fell out of favor, with several SAFT-enabled token sales falling under scrutiny by the SEC and only a handful of projects reported using SAFTs in 2019. The SAFT document, once thought as the means to enable an investment-like transaction to support the creation of a digital commodity without the regulatory overhead of a security, may prove to be a flash in the pan.
The chart also suggeststhe emergence of IEOs as a significant funding vehicle in 2019. The practice quietly gained momentum, with Binance Launchpad proving the most popular platform and proving the concept for myriad other exchanges. Though these are ‘ICOs’ by another name, they are distinguished here because IEOs have several unique dynamics, including selling a very small portion of the token supply, the immediate liquidity post-sale, and the aggressive stoking of FOMO-like dynamics. They are distinguished in S+C data so that observers can chart their evolution. They are not fundamentally difference practices, and when discussing trends in the sales of tokens, Smith + Crown generally agglomerates ICOs, IEOs, and SAFTs before drawing conclusions. The largest sale by far is that of Bitfinex’s LEO token. The sale was reportedly sold out privately before being open to exchange users, makings its classification as an IEO questionable. However, the industry broadly categorizes it as such, and the data presented defer to convention while consistently highlighting the distinction.
Finally, the graph shows the slower-than-expected growth of successful Security Token Offerings. To date, just shy of 35 companies have had successful STOs—more announced intentions to raise but never did. Despite STOs’ momentum falling short of advocate’s expectations, the strategy did not collapse entirely: 2019 has seen 13 successful offerings.
Smith + Crown will use this view regularly to comment on the evolution of the industry.
Smith + Crown developed several data processing methods in order to compile this unprecedented macro perspective upon industry financing, with data verification and deduplication amongst the central obstacles. For example, much of the data on equity funding is sourced from Crunchbase, but Crunchbase often categorizes equity sales as token offerings, vice versa, or double counts them. It also tags certain companies as ‘blockchain’ or ‘cryptocurrency’ companies when such technologies are peripheral to their business model. This is especially problematic during late-stage raises, which are often sizable and can skew the perception of aggregate funding models. Raises such as these are carefully filtered out.
In addition, as companies rebrand to be blockchain companies, a platform like Crunchbase will assume earlier raises were blockchain raises. This is often not the case. Robinhood’s earlier raises were bets on fintech and the viability of a more accessible stock market, before the trading of digital assets was part of their strategy. This should not be counted in global industry funding assessments, and such cases must be identified, tracked, and carefully filtered out as well. As with all of Smith + Crown’s data, claims of fundraising amounts for which our analysts can find no first-party or credible third-party evidence are typically left out of calculations.
While this approach enables Smith + Crown to offer market insights not available elsewhere in the industry, there are several limitations worth acknowledging during any interpretation of these numbers. It would be irresponsible for a research entity to not mention and explain these.
First, these data do not capture any funds coming into the industry on already trading digital assets. For instance, a wealthy investor wanting exposure to the industry’s future performance through the purchase of a publicly traded cryptoasset cannot be meaningfully distinguished from computerized trading activity and in any case usually does not provide a project with more resources to build out new blockchain solutions.
Second, these measures do not include projects selling their native asset into active markets. For example, Ripple has been selling assets into XRP markets to fund its work, but given the opacity in many projects’ lockup periods and token usage, this is difficult to track across the industry. As such, Smith + Crown excludes this from our tracking and numbers.
Third, this does not include airdrops, lockdrops, or other methods of token distribution that do not involve a financial transaction. Such mechanisms often create the conditions mentioned above, namely active markets projects can sell into.
Fourth, some token-based raises are not consciously bets on blockchain technology. For example, the security token raise of Elio Motors represents a bet on their ability to profitably produce a three-wheeled electric vehicle. The use of the blockchain for the security token was perhaps an indirect bet on blockchain as a platform for the compliant sale of securities but that is not Elio Motor’s ambition. Nonetheless, this represents a small fraction of the total raise numbers, and identifying and filtering them would need a case-by-case evaluation. These are not excluded from these numbers.
Finally, the above-mentioned methodology may double-count a small portion of investments that first went into funds (like the Blockchain Capital BCAP raise or the Science VC STO) and then were deployed in the industry through equity raises and ICOs. These would be difficult to filter out in their entirety, given incomplete reporting on where the exact funds raised went and when. We estimate this number to be less than $100m and have decided to ignore it.