Market for Initial Coin Offerings on record breaking and maturing path

17 September 2018

A record breaking opening to 2018 has seen Initial Coin Offerings yield more than their total funds raised since the first ICO in 2013. The market’s continued boom has been boosted by regulation in some key markets, which has helped the fundraising method mature and become more accepted as a mode of business, though fears of criminality in the sector still persist.

An initial coin offering (ICO) is a means of crowdfunding centred on cryptocurrency, which can be a source of capital for start-up companies. In an ICO, some quantity of the crowdfunded cryptocurrency is pre-allocated to investors in the form of "tokens," in exchange for other cryptocurrencies such as Bitcoin or Ethereum, or increasingly for fiat currencies (currency that a government has declared to be legal tender, but it is not backed by a physical commodity). These tokens become functional units of currency if or when the ICO's funding goal is met and the project launches.

The first ICO took place in 2013, with a total of two taking place that year. By 2014, this had risen to eight ICOs with a combined total value of $30 million. The total value of Initial Coin Offerings breached the barrier of $4 billion globally last year, with further growth projected for the coming period. Now in 2018, ICOs have gained further momentum and are emerging as a workable, alternative form of crowdfunding. Strategically, ICOs continue to crowd out traditional VC funding, especially in technology and Blockchain-related start-ups.

Hybrid models (combining classic VC/PE funding and ICO) are increasingly establishing themselves as a valid funding alternative. The continued rise of the ICO in 2018 has even seen the funding technique yield its firs unicorns (start-ups worth over $1 billion). Telegram and EOS boast an estimated record breaking $1.7 billion and $4.1 billion, respectively.

While the notoriously volatile value of the likes of Bitcoin has broadly risen, however, a number of factors could see the cryptocurrency bubble burst in the near future. ICOs are inconsistently regulated across the world, and, depending on the jurisdiction, they can take different forms including a security, utility token or digital currency. Prospectively, ICOs are increasingly an alternative to classic debt/capital-funding as performed today by Venture Capital/ Private Equity firms and banks.

Leading countries for Initial Coin Offerings

ICO unicorns

Overall, in the first 5 months of 2018, a total of 537 ICO’s with an estimated value of $13.7 billion have been closed successfully – which is more than all pre-2018 ICOs combined. According to data gathered by PwC’s strategy consulting wing, Strategy&, in cooperation with Crypto Valley, the US, Singapore and the UK remain the world leaders on the ICO front, in terms of volume. The trio have closed 157 successful ICOs between them already in 2018, with a further 153 planned before the end of the year.

The USA can chalk its success as a leading ICO destination up to its market being reinforced by clear and firm regulatory requirements, for example with the new Know Your Customer commitments, which ensure businesses verify the identity of clients and assess potential risks of illegal intentions for the business relationship. The UK has seen a growth in terms of volume and value, with its estimated funds raised standing at $507 million, Singapore yielded the highest value from ICOs of the three leaders. Singapore’s 53 ICOs brought in $1.1 billion in total. However, in terms of value, these campaigns have yielded proportionally far smaller amounts of capital than those based in the Cayman Islands, and the British Virgin Islands.

Thanks to these nations’ reputations as keystone tax havens, it is perhaps unsurprising that investors keen to see large returns would locate their funds in ICO projects which will ultimately be taxed minimally. The ten ICOs of the Cayman Islands scored a total of $4.2 billion, and the location has a further 16 such funding efforts planned before 2018 is out. At the same time, the 16 ICOs of the British Virgin Islands brought in a total of $2.2 billion, but there are only two further fundraising projects planned for that territory before the turn of the year. While the two island states might seem to command a disproportional amount of ICO funds, however, it is important to note that the aforementioned ICO unicorns were based in those locations.

Largest Initial coin offerings

As mentioned, the two unicorns EOS and Telegram dwarf the amounts brought in by the other top ICO campaigns to date. Their nearest equivalent, also hosted in the Virgin Islands, was Dragon. The Dragon Coin is said to act as a frictionless, low-cost & transparent alternative financial mechanism within Casinos, and raised $320 million.

Beyond these three, the top ICOs were dominated by those based beyond the Cayman and British Virgin Islands. Singapore hosted the fourth largest, Huobi Token, which delivered $300 million of investment. Elsewhere, Switzerland hosted six entries in the top 15 campaigns. HDAC (#5) raised $258 million, Tezos (#7) brought in $232 million, Sirin Labs (#8) saw $158 million, Bancor (#9) yielded $153 million, Polkadot (#11) enjoyed a $145 million investment, and The DAO received $143 million from backers.

The largest Initial Coin Offerings to date ($ million raised)

The US also hosted multiple ICOs at the top of the list, with Filecoin (#6) bringing in $257 million, and Basis (#14) gaining an investment of $133 million. Lituania (#10, Bankera, $151 million), Barbados (#13, Polymath, $139 million) and Israel (#15, Orbs, $118 million) each played home to a single top ICO meanwhile.

While the ICO market seems set to continue its growth in the coming years, however, there is still some scepticism about the technique. Investors are often deterred by the fact that only around a third of all announced ICO projects actually close successfully, while many projects are delayed and lose momentum during ICO preparation processes. Reasons can reach from legal struggles to problems within the ICO project team. At the same time, the market is still dogged by a reputation for a propensity to hosting fraudsters.

According to a report by EY last year, while many legitimate sources also use ICOs, many projects are often guilty of trying, with questionable ethical intent, to attract investors to help “introduce Blockchain in new markets” via white papers containing clichés aimed at attracting inexperienced investors. These investors often have no reasonable justification for Blockchain use, besides jumping on a bandwagon, and are easily influenced by buzzwords. These investors are also particularly vulnerable to criminality, as of the nearly $4 billion raised since mid-2015 via this financing method, as much as 10% – or $1.5 million a month – of issued tokens are estimated to end up in the hands of hackers.

If the ICO industry is to continue its meteoric rise it will need to address these concerns. On the evidence of markets where regulation has become more binding for the practice, such binding mechanisms have boosted rather than inhibited ICO growth, and so it is likely there will be more to come from governments across the world looking to provide a safe and reliable destination for ICOs and their investors.



8 tips for successfully buying or selling a distressed business

18 April 2019

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.