In case you slept through 2017, there was a new funding mechanism that earned startups billions of dollars. In fact, VentureBeat reported last August that initial coin offerings (ICOs) raised $1.3 billion in the first eight months of 2017. That’s just a small slice of the $21.8 billion raised by all startups through venture capital sources from January through August last year. It seems that ICOs are growing bigger as they grow more popular.
The DAO raised $152 million last May. In July, Tezos raised $232 million. Filecoin topped that with $257 million in August. By the end of February 2018, more than $1 billion had been raised by over 900 ICOs since the beginning of the year. Topping that list is Telegram, which raised $850 million in a pre-ICO sale on its way to extracting $2 billion from the marketplace.
Something clearly is going on here.
ICOs and Real Estate Crowdfunding
There are primarily three reasons why ICOs have become such a hotbed of activity with no signs of letting up too soon.
- There’s no regulation. No SEC, no regulators, no fire-breathing dragons huffing down anyone’s shirt. That’s got to be a relief for ICO issuers.
- ICO issuers make big promises. All you have to do is read their white papers to figure out that many companies raising funds through ICOs are getting to the golden palace on very little evidence that they have anything solid to offer. If you don’t have a good idea, all you have to do is be good at selling it. That’s what the white paper is for. Of course, I’m not saying all ICOs, or ICO issuers, are bad. But how can you tell? There is virtually no way to perform due diligence on most ICOs, which is why so many are disappearing with the money.
- The third reason ICOs are so popular is sentiment. Many new investors are putting their money at risk because they know someone else who has. And since there are no rules about who can invest in an ICO, like there is with traditional and crowdfunding investments, there’s no one looking out after investor interests except the investors, many of whom are unsophisticated.
Why Real Estate Crowdfunding is Less Risky Than Investing in ICOs
While real estate crowdfunding is still relatively new, it’s still less risky than investing in ICOs. That’s because there is some regulation in place to protect investors, and companies that don’t follow the rules will be punished. That’s not to say that rules won’t be forthcoming for ICOs down the road (I believe they will be), but until there are some, investors are on their own.
By contrast, real estate crowdfunding has three things going for it that ICOs do not have:
- The JOBS Act of 2012 provides for some stability in the market by updating the Securities Act that U.S. companies have been regulated by for over half a century. Title III of this act addresses crowdfunding activities, and Title IV establishes Reg A rules. The Act implements new rules for real estate crowdfunding platforms that protect accredited and unaccredited investors alike.
- Credible platforms encourage due diligence. Any real estate crowdfunding platform worth investing through can be vetted with as much ease as it takes to perform due diligence on investment properties themselves. You can be confident that a proper vetting of any platform you wish to put your money into will reveal whether that platform is transparent, trustworthy, and credible. There should be no empty promises.
- Proven track record. Real estate crowdfunding has been around long enough that few people do it now because they are following the hype parade. Real estate crowdfunding has its earned its place at the investor banquet.
I do not wish to discourage anyone from investing in ICOs. They’re not all bad, but they are all risky. Do your due diligence on any investment you wish to make, and don’t invest more than you can lose.