One thing I don't understand about ICOs is - what do the companies promise their coins to be worth? That is, if I have a Coin from your brand new endeavour - what can I, hypothetically, exchange it for? Do I get a vote in how your company is run? Can I give it back to you in exchange for a product or service later down the line? Or is it just a geegaw for me to put on a shelf, like a printout of a Patreon receipt?
they are for a product or service, the limited issuances of the token gives them a speculative market based on future demand and future supply.
the team and organization gets funded, the buyers are liquid, nobody makes ridiculous decisions counter to their dreams hoping for "an exit", because everyone already has one.
we don't have consumer or investor protections here yet so sure it is ripe for abuse, so far people are content with that, and we also haven't needed it
> the team and organization gets funded, the buyers are liquid, nobody makes ridiculous decisions counter to their dreams hoping for "an exit", because everyone already has one.
Can you expand on this? What do you mean by "everyone already has one" in this scenario?
Okay, in startups, corporations are formed and the equity (shares) in the corporation are doled out as currency. Completely useless currency given to helpers under the idea that they'll get rich one day in very improbable scenarios.
There is no legal way to sell the shares (hyperbole, but very many hurdles). And exchanging additional shares for cash investments only serves to make your non-sellable stake in the company smaller while increasing your tax burdens in many scenarios. These new investors are typically VCs and they push for changes in the company completely unrelated to the founders vision, and good exits never come, because of the many ways VCs can get their much of their money back before founders or even employees get anything.
In token sales, there may be a corporation for liability purposes but the equity in that corporation is not being sold at all. A product from the corporation is sold, a product with the unique characteristics of having easily formable secondary markets.
Tokens are initially created and sold in exchange for US dollars, or Ethereum or another liquid token. This is used to grow the company, just like any presale on kickstarter is used to grow a company. Yet, the equities regulator is sticking their nose in it (for good reason), but a more applicable regulator could be formed to help grow the market and still obtain the consumer/investor protections they desire. I digress:
Everyone that buys can immediately sell to other people, if the demand is there.
Everyone that earned tokens by helping the corporation, including the founders, or large purchasers who also wanted to see the project develop, can also sell to other people. Immediately.
If there is demand, then existing holders that helped fund the company (buy buying early), can sell to other people at a higher price.
This is only "controversial" and "confusing" because it is more advantageous than the promises people sell to 20 year olds spending decades of their life for useless sweat equity, and it undermines the existing VC industry. It is potentially as revolutionary as "the share company" was in the year 1600.
Isn't this a bit of a Chesterton's Fence situation? There must be reasons other than "VCs are greedy!" for employees not being able to sell off their stocks immediately.
The most obvious way to abuse this would be to join or create a startup, go through the ICO process, then sell off your shares, and, well, exit. Leave the company. You're rich, now - why keep working to build the product you (or your boss) promised to deliver?
> There must be reasons other than "VCs are greedy!" for employees not being able to sell off their stocks immediately.
Well thats not what I said, so I don't know where you got that from. Strawman much?
I said there are legal problems for selling stocks... of the privately held company variety if that wasn't clear. Those legal problems aren't stipulated by the VCs, well, at least one of them is, but it applies to them as well. The others are from the federal government. I'm not going to bother writing a dissertation on that.
VCs have many ways of getting their money back, and many of those ways are at the expense of employees even if they bought their options.
> The most obvious way to abuse this would be to join or create a startup, go through the ICO process, then sell off your shares, and, well, exit
What? Just to clarify, are you conflating ICO tokens with equity shares? Or saying something like "your share of the ICO"?
> You're rich, now - why keep working to build the product you (or your boss) promised to deliver?
This is where the consumer and investor protection concerns come from right now from various regulator perspectives. ICOs are much like Kickstarter, the answer is you don't have to deliver. Reality is also much like Kickstarter, people have a dream and want to deliver. People do deliver. People that have never touched millions of dollars in their life, go out and play business person until the money runs out.
Many technical dreams that wouldn't fit into a VCs portfolio are able to get funded now. Thats really all it comes down to.
People put their reputation on the line. That doesn't mean much to all people, and they have bad reputations now.
There are several advantages in the ways to mitigate these risks. First, these communities come with a big open source culture. If the team starts messing up, there are still ways to contribute or even carry on the project, a lot of the times. Most of the projects have a big decentralized component to them, which does enable others to carry the baton.
Secondly, the token obtained in the ICO has an exchange rate. You, the buyer, are able to exit your position while a market still exists. Most coins, even "dead" ones, have a market, or CAN have a market. Even if they have their own blockchain, they can be revived with the participation of just a few computers, and exchanges will list them.
Are they? It's hard to imagine there being enough buyers to match sellers if/when a coin hits a high peak, let alone if there is a collapse of confidence in the coin or product or its promoters
There are ways to manage liquidity, even when your position is much greater than the posted or even average liquidity on the market.
I've held positions in tokens upwards of 10% of the entire issuance and have been able to move in and out within a few minutes, I usually aim for ~5% of the last spot price.
This is true of any market, just assume there is at least 1 rational actor in the market, what are they seeing that makes them so excited? Warren Buffet - before pivoting to the conservative investment baby boomer guru - bought illiquid discarded companies usually up to 51% of the equity and sold them on the public stock markets at mass profits. In 2017, the international crypto markets are way more liquid than the US equity markets were in the 1970s.
