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Startups today have many options to raise capital. While bootstrapping works for some, most need an infusion of funds to get off the ground. Companies now have a new option -- perhaps the most global, inclusive and democratic: the "Token Sale" or "Initial Coin Offering" (ICO).

In 2009, Bitcoin was met with apprehension as the first decentralized cryptocurrency. There are now as many as 5.8 million unique users using a cryptocurrency wallet. Its market cap sits at over $150 billion as of October 2017.

More importantly, companies are finding the ICO a valuable way to raise funding. Whether you are an early adopter of cryptocurrencies or not, the technology offers many unique benefits, and the token sale process can be great for companies and startups looking to raise capital.

What Is Blockchain?
Cryptocurrency, which is a form of digital/virtual currency, has been around for years. Cryptocurrencies are named for using cryptography to secure transactions and control the creation of additional units. In 2009, when Bitcoin was introduced, it was the first time a cryptocurrency had existed without a central repository or single administrator, such as a country or company. It worked with the invention of the blockchain. The blockchain is a distributed digital ledger of cryptocurrency transactions that is recorded and verified by a network of nodes. Every Bitcoin transaction is broadcast to this network of nodes to create independent verification of the chain of ownership of every Bitcoin amount.

Ethereum, the No. 2 cryptocurrency behind Bitcoin, is a distributed public blockchain network that can run the programming code of any decentralized application. Ethereum revolutionized the blockchain with smart contracts, which is computer code that runs on the blockchain to facilitate exchanges without the possibility of fraud or third-party interference. Ethereum introduced the ERC20 protocol, which is open source and allows other tokens to be created on top of it to execute their own smart contracts. This has become the engine behind most ICOs today.

What Is An ICO?
With the growth in the cryptocurrency market and blockchain technology comes the opportunity for startups to crowdfund through cryptocurrency. In an ICO, a company uses blockchain technology to issue cryptocurrency and offer it for sale to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin. 2017 has been a record year for successful ICOs. For example, The Bancor Foundation raised $153 million in three hours and Status raised more than $100 million.


Fundraising On Blockchain
There are a number of reasons companies are turning to ICOs over traditional options. Here are a few key benefits:

  • It opens up a global market of potential investors. Ninety percent of North American and European banks are exploring blockchain. Fundraising through an ICO offers a much larger market to present your company’s tokens to, increasing the likelihood of finding a large base of investors.
  • It involves lower costs to address a large market. Due to how blockchains process transactions, ICOs present a much lower cost option to address and manage a global market. Banks using Ripple, a Google-backed startup that uses blockchain technology to settle financial transactions, have seen a 33 percent reduction in operating costs.
  • It offers increased liquidity. A blockchain often opens up the option of a secondary market where tokens can be traded after the ICO, providing fast liquidity. You can also obtain blockchain-backed loans through companies like SALT.
How To Raise Funds On Blockchain
Once you’ve decided to raise funds through blockchain technology, there are a few considerations. While the benefits listed above offer great incentive to use blockchains, they do come with their own unique challenges.

Choosing A Jurisdiction
Even with a tokenized asset, you must find the right jurisdiction for your tokens to fall under. Some jurisdictions will consider your coins a security. The State of Delaware, which is already the corporate home of the majority of Fortune 500 companies, recently invoked a law allowing businesses to maintain shareholder lists and other corporate records on the blockchain. Switzerland has become a fintech hub after abolishing their banking secrecy laws and supporting an alliance of Swiss companies called Crypto Valley. The Cayman Islands are another attractive option due to their blockchain friendly service provider infrastructure and experience supporting recent ICOs such as EOS and Domain Developers Fund. Estonia has many e-government initiatives that support blockchains, and they also recently announced their own cryptocurrency.

Understanding Tax And Compliance Laws
While many countries are examining blockchains, there are not yet any clear standards for cryptocurrency compliance. In the U.S., the IRS classifies cryptocurrencies as an asset and can impose capital gains taxes. Laws surrounding cryptocurrencies and blockchains are likely to change often until they are more mature. Make sure to gain a full understanding of the tax and compliance laws of your jurisdiction and keep an eye on any proposed changes.

Meeting Know Your Customer (KYC) Requirements
Know Your Customer (KYC) is a method for verifying the identity of your investors. While cryptocurrencies such as Monero offer a privacy coin that allows for anonymous transactions, many banks require issuers to meet KYC and Anti Money Laundering (AML) regulations.

Blockchain Management Considerations
After your ICO, there are still a number of management challenges to consider. Under certain regulations, you may need your investors to avoid selling tokens in the first year. Depending on where and how you structure your offering, you may need to exclude U.S. investors from their ability to purchase your tokens. Compliance with KYC and AML regulations are also an ongoing effort.

While fundraising through an ICO needs to be done with caution, the blockchain market is expanding rapidly and offering any company, no matter your experience with cryptocurrencies, an opportunity to reach a major audience of investors.