Kik, founded in 2009 as a scrappy mobile chat application by a small group of students from the University of Waterloo, grew to encompass a user base of approximately 300 million users, and successfully raised 120.5 million USD from some of the premier venture capital funds in the tech industry. Yet, as the company looked at road forward, it found itself increasingly facing a losing battle against the social media behemoth Facebook.
As ever larger portions of the ad revenue smaller scrappier startups dependent upon online advertising revenue needed was being swallowed up, it forced them to find alternatives. Developing a tokenized economy through an ICO was a logical step which would permit Kik to develop their own miniature economy to compete on more equal footing.
As the technology sector pivots towards open source software development and Initial Coin Offerings, the United States regulator environment is increasingly pushing investment activity away from the United States and into other countries.
The Rise of Crowdfunding
The history of Crowdfunding in the United States started in the city of Boston, Massachusetts during the fall of 2000. After attending Clark University with a major in music composition, and completing his degree at the University of Vermont, Brian Camelio began to study computer programming. After creating and launching his first internet web application (an online fundraising portal for nonprofits), he heard increasing first-person accounts from close friends in the jazz music circle about unethical business deals and business practices with record companies.
This drove Brian to focus on developing an internet based platform which would provide artists with a market for up-front funding donated directly from their fans. Artistshare was born, and Reward Crowdfunding kicked off the era of Peer to Peer (P2P) Crowdfunding , which gave rise to platforms such as Kickstarter and GoFundMe.
The second act of the history of Crowdfunding in the United States starts in San Francisco, California in August 2003. Christopher Larsen, CEO of E-Loan founded Californians for Privacy Now with $1 million of his own money and after a hard fought legislative battle in California, he helped get financial privacy laws enacted which became a standard for the rest of the nation. Larsen always identified himself as, “radically pro-consumer.”
In early 2005, Larsen stepped down as CEO of E-Loan to pursue a radical new method for borrowing funds through Crowdlending - bypassing the banks to raise funds for loans directly from consumers. On February 2006, Prosper Marketplace opened its doors to the public, and created the second iteration of Crowdfunding: Peer to Peer (P2P) Microlending. The site acted as “as an eBay-style online auction marketplace with lenders and borrowers ultimately determining loan rates using a Dutch auction-like system.” The age of Debt Crowdfunding kicked off and Lending Club swiftly moved into the space.
In 2008, Prosper and Lending Club faced opposition from the United States Securities and Exchange Commission. The SEC determined it held jurisdiction over the P2P lending marketplace, and both Prosper and Lending Club were in violation of issuing unregistered securities. Ultimately, both companies were fined, forced into a quiet period, required to file a Prospectus for every note issued and register across all states which they transacted in. Prosper filed the required Prospectus, changed their business model to remove the Dutch-Auction system, and replaced it with a pre-set rate formula. On March 15, 2012, Christopher Larsen announced his resignation from the role of CEO in Prosper Marketplace. In September 2012, he founded OpenCoin, which would evolve into Ripple Labs – the company behind the Ripple protocol and Ripple Currency (XRP).
Act three in the history of Crowdfunding in the United States brings us to the brainchild of Kiva co-founder Jessica Jackley and Dana Mauriello. In May 2011, they launched the site ProFounder which allowed entrepreneurs to share a percentage of their revenues with investors (their friends, family, and community) over time in exchange for an investment, and the age of Equity Crowdfunding kicked off. In February 2012 ProFounder closed its doors over regulatory concerns related to the Securities Act of 1933. Prior June 16, 2015, under Regulation D of the Securities Act of 1933, “…equity crowdfunding (under Regulation D) was limited to individuals meeting certain net worth and income levels (accredited investors) and was conducted by a licensed broker-dealer.”.
Once new Crowdfunding provisions were included in the JOBS Act of 2012, a flood of new companies moved into the space, such as Indiegogo and WeFunder.
Initial Coin Offerings and the Rise of Decentralized Crowdfunding
On July 31, 2013, Crowdfunding took a historic turn into a decentralized future with the first Initial Coin Offering. The MasterCoin project had a month long fundraiser, where 1 Bitcoin sent to a Mastercoin Exodus address would net 100 Mastercoins. At the end of the one month period, the first ICO raised 5,120 Bitcoin valued at 500,000 USD.
The arrival of Turing complete blockchains courtesy of Ethereum, created a quantum shift in Crowdfuning from centralized servers and websites with defined jurisdictional regulations, into a decentralized world of Initial Coin Offerings (ICOs). This shift coincided with a shift in the software development arena towards open source software development.
The Open Source Software Funding Problem and ICO Solution
According to an August 2016 article by Wired,* “…the White House released its official federal source code policy, detailing a pilot program which requires agencies to release 20 percent of any new code they commission as open source software,….”* Governments and corporations are racing to embrace open source software in an effort to share the burden and costs of developing common infrastructure and compatibility standards. Yet, both are guilty of looking for a free lunch on the backs of the open source community.
The Ethereum blockchain and its unique ability to develop smart contracts provided a novel solution to this funding problem - not only for the open source software development community, but also for startups and companies seeking alternative methods to fundraise and develop economies of scale. The ability to create unique tokens (ERC20 tokens) with their own smart contracts unleashed a boom in the altcoin marketplace. By February 28, 2017, the total capital raised by ICOs since August 31, 2013 was valued at $168,000,000 USD.
Yet with this boom, the United States is increasingly finding itself left behind.
In an effort to bring securities regulation into the modern era of Crowdfunding, the Jumpstart Our Business Startups Act (JOBS) of 2012 modified the existing Securities Act of 1933 to create specific exemptions for Crowdfunding ativities which raised $1,000,000 USD or less. Given the average ICO has valuations which are multiples of this, US citizens and individuals with a US based IP address are increasingly finding themselves locked out of virtually every ICO. Furthermore, countries such as Russia, China and Japan are recognizing cryprocurrencies and, in the case of Russia, creating a regulatory path for Initial Coin Offerings.
Unless the United States embraces some wholesale change it will find an increasing share of technology sector funding outside the reach of its financial markets.
What did you think of today's sec comments!?
@austinsandersco thanks for the question. Seems like I spent quite a bit of time on everyone else's blog talking about it.
I can't say I'm surprised with the ruling. I can say I am disappointed they chose not to have the Crowdfunding exemption from the 2012 JOBS Act apply to ICOs . While the scope of that exemption is limited, it would have a least signaled the SEC sees the importance of this new method to raise capital and Congress needs to expand the limits on the exemption to make the US financial markets the defacto place for ICOs to happen.
Do I think this will kill ICOs? No.
There are about another 168 countries in the world with much more accommodating attitudes towards ICOs. The consequence of this SEC ruling will cause a mass exodus of technology and finance companies from the US in the coming years. When one looks at the future of technology, blockchains are the bleeding edge of that technology. Each blockchain application platform (Ethereum, LISK, Stratis, NEO) is basically a new internet ecosystem about to be filled with new web application technology and new user experiences. Tech developers will naturally move into this space, and I think that happens significantly when LISK releases it's SDK to the Javascript developers of the world. Startups will form and ICOs will provide them a new way to raise capital cheaply. What compelling reason exists to stay in the US if I cannot participate in ICOs and I have been cut off from the ability to fund my tech company with an ICO?
The finance industry will move away from the US as well. Consider what all the major banking and investment houses (JPMorgan, Goldman Sachs, etc.) have been communicating with the Ethereum Hyperledger project. The future of banking is blockchains. If they cannot reap fees from lucrative ICOs, such as Bancor, what compelling reason do they have to keep a majority of their operation here. Same holds true for Angel Investors and Tech Venture Capital firms.
Also, an overlooked aspect of this ruling is the US Income Tax ramifications . By ruling ICO tokens are some form of security or financial instrument, trading cryptos is now excluded from Section 1031 Like-Kind exchanges of property capital gains tax deferments. Rather than calculating tax only when the crypto is translated to fiat, now every crypto trade must be reported and capital gain tax remitted in the year the trade was executed, regardless if the trade was into fiat or crypto.
My feeling is the next move by the SEC (and quite possibly the IRS) will be against Poloniex. In fact, I think in many ways the ruling was forced because of the shady bullshit they have been pulling. On a couple of subreddits I did read of a number of people splitting the cost of legal representation to file complaints with the SEC about Poloniex.
Living during interesting times now in the crypto world.
This is a wonderful post. I enjoyed reading about the history of crowdfunding in general. I do agree that the United States needs to embrace blockchain technology at some point in order to regain its edge in entrepreneurial finance.
@rocjkjon thanks for taking the time to read and comment. I appreciate it.
I agree with you on that point. When one considers banking is beginning to embrace blockchain tech much more openly and the token economy is in it's infancy, creating walled garden, decentralized economies ripe to scale, it's foolish this has not even been addressed in the United States. After being in accounting and taxation for over 20 years one thing I can say will affect the investment choices of professional investors and entrepreneurs - Uncertainty.
Moreover, it doesn't mean they will not invest in something with regulatory uncertainty, they will just go to a place which removes that uncertainty and invest in it there.
Very interesting!
@rtdcs thanks for the read and comment. I appreciate it.
I'm a huge fan of this trend of decentralization. Technology is helping to enable it across more industries every day. It won't be long before corrupt central governments get outcompeted by decentralized solutions across all industries.
@chillsauce thanks for taking some time to read and comment. The support is appreciated.
Just yesterday I was reading an article on Zerohedge about how open source blockchains are freaking out the government and it reminded me of why I bought my first Bitcoin in 2013. I can remember how it completely blew me away I could park value away on a pseudo-anonymous ledger and transact with someone without any intermediaries. It unleashed an age of decentralization which I believe will touch every aspect of our lives in the near future.
The response is the government can either fight a loosing battle in a futile attempt to stuff the genie back into the bottle, or it can attempt to foster growth in the field and become the defacto place future blockchain companies want to park their money and engage in development. I think the next stage of resistance towards the blockchain revolution will be governments attempting to apply sales and use tax rules to blockchain services, then aggressive enforcement of use tax rules, since the end user's Nexus can easily be determined. I also would not be surprised to see a national sales tax come online in response to the growth of blockchain services.
Fantastic Article - Very surprised it only has 3 votes so far!! One major problem of STEEMIT - Another post by a user with a 65 reputation that spent much time and energy contributing to STEEEMIT and because he didn't buy a Whale Pump - it gets missed by thousands that would likely enjoy reading it. @lpfaust - I wish I had the juice to make this post become more known - someday hopefully I will and will help all of your great content created the best I can! @jerrybanfield - Jerry - As one of our leaders - would you be willing to help this post get the attention it deserves? If you don't agree it deserves attention then disregard - Thank You both
@krytonika thanks for taking the time to read, comment ad upvote. I appreciate the support.
Thanks for the kind words about the content I produce. I'm glad to see my followers read and enjoy what I produce. At one point, I made certain to kick out a certain number of pieces of content, targeted to a specific audience, hoping to build a following which would eventually yield regular tangible rewards. Eventually I got burned out and walked away for a bit. Nowadays, I just put out what interests me on my own terms. My hope is at some point in the future, those who stand to benefit the most will take a more long term vision rather than focusing on extracting value immediately.
Thanks again for taking some time to single out my post for some attention. It's greatly appreciated.
I got some valuable info about ICO. Thank you @lpfaust, I appreciate your efforts to give readers the best.
@shirish5 thanks for taking some time to read and comment. I appreciate it.
damm this was really interesting to know about how things are going right now thank you for sharing here in your post.
@blazing thanks for taking some time to read and comment. The support is appreciated.
Personally, I'm getting awfully annoyed I am being locked out of ICOs simply because of where I live. When one considers the sheer volume of ICOs and the fact that this is the future of the tech sector, the US will loose its dominance in this arena as more developer go to more ICO-friendly countries to raise money. Once the funds are raised, what incentive do they have to return?
Thank you for sharing this useful and wonderful article
Crypto is the way of the future!
We just have to hope that US govt embrace the Blockchain technology but being decentralized might just cause them problems in tracking money in and out from ICOs.
@cryptopie thanks for the read and the comment. I appreciate it.
I am interested to see how this plays out, but I don't think the ruling by the SEC yesterday is a good one. Regardless, there are like another 168 or so other countries in the world, some with a more favorable stance on cryptocurrencies, so I don't think this would signal a slow down or demise of blockchains. However it would absolutely signal a geographic shift for the centers of technology and finance.
This is one of the best posts I have read in while @lpfaust, good job!
It amazing to see how quickly things change and develop develop in the crypto world. Some countries are sure to benefit by being part of the vanguard, while others like the US are thinking completely backwards in a panic attempt trying to protect the centralization of power.
I guesing that the US eventually will have to open up and allowing US citizens to participate in the ICOs.
@cryptodan thanks for checking out the article and commenting. I appreciate it.
My hope is the US begins to view ICOs not in the light of new securities which need huge amounts of regulation and have large costs associated with registration. Rather I'd like them to take the stance that ICOs are just another form of crowdfunding tool which startups can use to raise capital in a very inexpensive way. However the current ruling on the DAO is not stoking my optimism.
Already anyone with a US based IP address is locked out of virtually every ICO for this very reason. If things do not change, the center of power for tech and finance will shift away from the US.
That was wonderful to read how IPO's are changing the shift of market in the Us.
@cityslicker thanks for the read and comment. I appreciate the support.
One small correction - it is ICOs not IPOs.
@lpfaust,
This is a very useful post for Crypto Lovers and ICO investors. Really appreciate your effort and thanks for sharing!
Cheers~
@theguruasia thanks for taking some time to read and comment. I appreciate it.
This post has received a 18.61 % upvote from @booster thanks to: @lpfaust.
This post received a 2.1% upvote from @randowhale thanks to @lpfaust! For more information, click here!