TR 31.08

// EQUITY VS TOKEN CAPITAL RAISING

TL:DR: if your product would not work without a token, and the success of that product would necessitate a rise in the value of the token, raise capital through the token. If not, raise through equity.

There are two fundamental questions that need to be considered:

1. If tokens did not exist, would it be necessary to invent them to make your product [better]?

No? Then you do not need a utility token. Do not create one, or try and raise capital using one.

Never forget: the entire purpose of DLTs is disintermediation. Bitcoin was about value transfer between two individuals, without the need for a third. Perfectly good products that intermediate their user flows with additional steps requiring tokens will never win.

You could tokenise your equity and sell that. But that token should have zero utility in your product. Keep investment instruments out of products.

Yes? Then you do need a token. Try question two:

2. Does the success of your product necessitate a rise in the value of your token?

No? Use an existing token and concentrate on solving your product problems. Absolutely do not sell this token in a capital raise. Raise via equity - tokenised or standard.

Yes? Raise capital through the token. Have all future value accrue to the token. Do not have a conflict of interest with value accruing to some related equity vehicle.

There are a hundred exceptions to the above, but the rules apply to 99.99% of companies seeking capital. It is really not that complicated.

There are a few hard truths that need to be understood when it comes to tokens and capital raising. The are 4 models that work:

1) If you do not need a token, don’t create a token. The first question we always ask at The Reserve is “if you had no token, would you need to create one for your project to operate?”. If the answer is no - don’t have a token. Simple.

2) If the answer to the above question is ‘yes’ and you do need a token, then the next question to ask is whether your token has any true value. If there is actual value accruing to the token, you should then have a pure token raise. The value is in the token instrument itself. There should be no equity.

3) If, however, the token is used to perform a necessary function, but there is no genuine reason why it should materially increase in value, then this is a pure utility token. There should be zero token raise and it should be used only as a product. Raise through equity.

4) Finally, the most common and most denied scenario is when the token is not actually needed. This is the case in about 99.99% of projects. If the token isn’t necessary - don’t have a token raise. Don’t try to make the token model fit the business model. Just because the space saw sky-high returns for a while and you wanted to capitalise on the 100x return, doesn’t mean you should have an ICO. Investors are far more sophisticated now and are questioning the value in the tokens like never before. Raise through equity.

It is really not that complicated.

// MUST READS

// DISASTER OF THE WEEK

CoinDesk - Apple Abruptly Orders Coinbase Wallet to Remove Crypto Collectible.

// TRACTION

  • Huobi acquires a public company for $70 million

  • Lloyd's of London Makes Quiet Entrance Into Crypto Insurance Market

  • Only 10% of companies are piloting Blockchain integration

  • Canadian Blockchain ETF is in the last stages of obtaining regulatory approval

  • Kenyan banks are seeking regulatory approval to use distributed-ledger technology

  • China’s government has warned of “criminals” attracting retail investors into Ponzi schemes using buzzwords such as “blockchain” and “virtual currency”, as official concerns over risk trump support for financial innovation.

  • Bitcoin mining consumes the same amount of electricity Austria does

  • Blockchain hiring is booming in Asia

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James Roy PoulterComment