ICO IQ — “Why the ‘Q’ in ‘Iconiq Lab’?”
People often ask me why we spell “Iconiq” with a “q”. The unfortunate truth is that Iconiclab.com is a wedding photography site based in California. I know, bummer. So, we added a “q” because it generated the same sound, and you know what… we immediately realized that we branded ourselves with “ICO IQ.” It’s funny how things unintentionally work out. So, here I am about to advise you how you can increase your ICO IQ and smartly launch a token for your own business venture. Yes, this means I am going to discuss regulation, taxation and governance of ICOs (que the clicks of half of you now closing this article). Here we go…
First things first, not every startup should launch a token. Many crypto projects do so because the crypto community has a direct utility for their currency or token, or it’s a scam. Tokens are not just for blockchain or crypto ventures, though, as more traditional style ventures theoretically could launch a profit-generating token. However, the regulatory issues surrounding such a launch are unclear or unfavorable in most jurisdictions, making a traditional equity fundraise the more viable, current alternative.
Traditional ventures that can leverage the network effect of users in their business model, however, have a direct use case for tokenizing their venture through a utility token sale. Such ventures may create a utility token that can creatively service their user base and various stakeholders within their platforms ecosystem. Platforms where users solicit their own data or content, such as in banking, insurance, social media and many more, can tokenize their model to provide value back to those who provide data. Club models can leverage tokens as the proof of membership, and hybrid models can blend the aspects of a security with a utility token to derive value to holders. The styles and elements of tokens we may see are only limited by human creativity as we are on the verge of tokenized business models entrenching themselves in the venture ecosystem. It is essential to determine if such a business model makes sense for you before moving forward with a token sale or ICO.
Once you decide a token sale is right for your venture, it is essential to be fully transparent with your token launch. This means not hiding the identities of your team behind the veil of anonymity… showcase your personal and professional achievements and elaborate why you are the right team to launch and scale the venture. Carefully detail the characteristics of your token and its sale by being forthcoming about the amount you are raising, any side deals you have structured with large participants and the amount of tokens the management team will be receiving. Make not only your contract/protocol available for review, but your entire business model. This allows for parties to conduct due diligence on your venture to ensure they can identify the utility of your token instrument, and if it makes sense for them to hold.
Post-token sale, the same levels of transparency must be observed. Disclose the uses of funds raised and show material cash flows as they arise. In this light, I would recommend participating in Santiment’s Project Transparency alongside other responsible crypto projects who aim to provide actionable and transparent financial information to their holders.
The next step is to ensure there is proper governance over the venture to hold all parties accountable for their actions and ensure everybody acts responsibly in completing duties for various stakeholders. This means proper delegation and oversight of tasks within the organization and some mechanism that holds the venture or project accountable to their shareholders, as well as token holders. This should come in the form of a formal board appointed by token holders, or some other method of oversight. This is essential in ensuring proceeds raised in the token sale are not misappropriated and put to the agreed upon use.
Every international jurisdiction has their own regulatory body that varies in how it views ICOs. Regulatory implications range from securities law, public marketing restrictions, know your customer & anti-money laundering procedures (KYC/AML), and exchange listings. It is imperative to work with experienced legal teams in your launch jurisdiction, and seek the proper regulatory approval to ensure you remain fully compliant in your token launch. Failure to do could result in a breach of financial security or other laws, and can come with severe punishment.
Lastly, do not ignore the tax consequences of your token sale. If you are not issuing a security in your jurisdiction (IE, a utility token) or launching a nontaxable entity, such as a Swiss Foundation, as the SPV for the token sale, you likely will have a tax liability on the proceeds you raise. It is imperative to work with the taxing authority in the jurisdiction of your sale to ensure you are not breaching any tax laws and to find the optimal tax strategy for your token sale.
Following these steps will help you smartly launch your own token sale. Additionally, crypto investors should be wary if an ICO does not hold itself accountable to the above guidelines, and weed these projects out in their own due diligence process. If you need assistance in your own token sale or have any questions, please feel to reach out to us at email@example.com, or contact knowledgeable persons in the crypto economy. Only through the collaborative efforts of responsible individuals with ICO IQ can we ensure the longterm sustainability of the crypto markets.
By Patrick Lowry,CEO — Iconiq Lab
Patrick is a venture capitalist and investor with nearly a decade of financial industry experience. Previously, he was a PwC auditor and a startup co-founder/CFO. He holds an MBA, a CPA license and a BS in finance and accounting.