With the Securities and Exchange Commission moving to crack down on fraudulent crypto-schemes, the allure of crowdfunding capital through initial coin offerings on blockchain platforms appears to be fading.
While such investments offer ease of entry – no lawyers, banks or regulators needed – they have also proven ripe for graft, with many schemes lacking viable business models or track records.
At the close of the fiscal year, and a year after the formation of its Cyber Unit, the SEC reported it had taken enforcement actions against more than a dozen digital assets and ICOs.
“Some of the offerings are simply outright frauds cloaked in the veneer of emerging technology,” the regulator stated in its annual report.
Many investors, attracted by the promise of a game-changing technology, learned this the hard way.
In 2018, the fever pitch around ICOs seemed to fall as rapidly as it had risen.
One research company, ICORating, found that while the ICO market more than doubled in a year – raising more than $11 billion in the first half of 2018 – 55 percent of ICOs in the second quarter of 2018 failed to reach their crowdfunding goals.
The founder of one crypto-crowdsourcing platform recently voiced what has become a common sentiment in the blockchain space. After shuttering its proverbial doors last year, the Cofound.it CEO Daniel Zakrisson wrote in September: “The community-driven ICO concept of crowdfunding [is] dead.”
Darrell Hines, managing director of Cayman-based Ronco Metrics, agrees.
“ICOs have a sort of mystique about them – no, they have a stigma more than anything else, in honesty, because a lot of it is based on speculation, hype, the promise of something that doesn’t exist,” he said.
“ICO is sort of passé. A lot of the industry is working towards ICOs being yesterday. There are a lot of successful ones but there are more failures … essentially people just ripping people off.”
So how do blockchain innovators turn the tide and garner investor confidence in the crypto-sphere?
Hines hopes that rooting digital tools in real-world assets – in this case, cargo ships – will do the trick.
A forged umbilical cord
The Caymanian-owned company announced in mid-2018 that it had partnered with a fourth-generation Greek shipping company, Sea Tribute Shipmanagement Ltd., to raise $116 million toward the purchase of up to five ships.
“An independent report commissioned by them indicated it’s a great time to now expand a fleet,” Hines said.
Ronco has pitched raising this capital through a blockchain platform, such as Ethereum, with an eye to integrating the strong points of a more traditional stock market launch.
“What we propose is that we tokenize the business by allowing, with certain minimum buy-ins at a certain price per token, investors to buy a token, which gives them rights to profits in the business,” Hines said.
“What we’ve done is created a forged umbilical cord between blockchain and the traditional. So the Greek shipping company will continue to own, manage, operate, maintain and run their fleet of ships across the oceans with all of their chartering contracts in place. Nothing is going to change for them. But in order to do that, to buy the fleet, rather than the bank owning it or somebody else, token holders will own it.”
In essence, the tokens function like shares in a publicly traded company, but rather than exchange through Nasdaq or the New York Stock Exchange, “the idea is to sell shares as tokens on a blockchain.”
Pantelis Lemos, managing director of the shipping management company, called the approach “the perfect marriage of two worlds” in a press statement released in July.
“Shipping is in a high growth phase now and embracing the blockchain provides us with a catalyst that will allow the family to continue trading for another four generations,” Lemos said.
Hines estimates about 90 percent of purchased token value will be used toward actual assets.
Ronco trades exclusively in securitized token offerings, an asset-backed token that currently accounts for a fraction of token types on the ICO market.
These securitized tokens, likely to be offered under the name Bulk, seek to package the security of a traditional stock asset with the accessibility of an ICO.
“What we’re trying to do is make it very traditional. We’re not reinventing the wheel. We’re not reinventing how business is done. The dot-com bubble was more of a reinvention than what we’re doing. We’re just using a different platform and technology. Then we have the know-how to put it together,” Hines said.
By bringing together the best aspects of old school trading with the innovative drive of blockchain, Ronco hopes to attract a wider variety of investors, from the so-called “whales” of cryptocurrency to more traditional traders.
“We feel there is a definite appetite from investors looking to invest in an alternate asset class, certainly a riskier asset class. On the flipside, it’s not as risky as you think because it’s asset backed,” Hines said.
“We do know there’s definite interest from the ‘whales’ – these are the early adopters of Bitcoin, early miners, people that came out at the peak and now are sitting on $50 to 60 million.”
Hines’s associate at Ronco, Fergus Dignan, added that, unlike the early days of dot-com, such investment will not be limited to the venture capitalists of the world.
“An ordinary investor never got a chance to invest at the early stage. This is an opportunity for ordinary people to see a business, put their money into it in an early stage, and take it out of the grasp of the venture capitalists who take the initial profit and then sell off when none of us can afford it,” Dignan said.
Right now, the initiative is on the cusp of launching, with a white paper and business plan complete and a private placement memorandum established to guide investors.
The tricky part will be anticipating regulations that have yet to be written in Cayman.
“We’ve designed the token to be as close to a security as we think it’s going to be, so that when the laws do come out in Cayman, any gap will be quite small,” Hines said.
“As far as we’re concerned, we’re a security and we want to ensure there is absolute compliance with anything that comes out. Unfortunately, now, we’re in a gray area.”
With 18 years of experience working in IT, Dignan, however, is confident that Ronco is ready to navigate the waters between digital and physical industry: “We’re quite innovative in what we do. We’re not a typical IT company in the traditional sense.”