The Path to Discovering Non Traditional Ways to Raise Capital: ICO vs STO
By Dawn Dickson, Founder & CEO of PopCom
My journey exploring non-traditional ways of raising capital started in late 2017 after my company PopCom completed our seed round, bringing our funding total to $900,000 from angels and VC funds. All 2017 the tech industry, and almost everyone else, was buzzing about bitcoin, cryptocurrency, and initial coin offerings (ICO). When I began hearing about ICOs and the capital that startups were able to raise through them, I became enthusiastically interested in learning about the process. Like many founders, I have a compelling product in need of a substantial infusion of cash to reach its true market potential. This has been quite a challenge, because again, like most founders — particularly female founders of color — I’ve been at the mercy of the Silicon Valley machine. Although I have been successful at raising venture capital, I am still caught in an exhausting cycle of convincing VCs of the massive potential of the self-service retail industry and why they should invest. A software product of this magnitude takes a lot of time and capital to build, and VCs want to see revenue generated before they will go ‘all in’ — keeping this in mind I began to explore my options for raising capital.
After spending significant time researching ICOs, our team was absolutely interested in moving forward, however there was increasing opposition to ICOs among the startup and VC communities because they were not regulated. Before we pulled the trigger I also wanted to see how things with play out with all of the companies who successfully raised via ICOs, and make sure things had been, and could be done, legally.
We posted our whitepaper online started generating strong interest in the U.S. and internationally. The waiting list on our token page was getting longer, and our runway was shorter. We had a crucial decision to make about whether our next round will come from traditional VC, or if we are going to take the leap into an ICO. We had options on both sides, however there were still many unknowns. To add to the already massive amount of learning and work involved in developing a blockchain product and taking the steps to raise an ICO, the laws around SEC compliance were literally changing daily — and they’d even started arresting founders. I knew that a signal – it was the end of the ICO as we knew it.
Even though the wild west of non-regulated 9-figure ICOs with 1000x promises returns is done, we have a new investment instrument on the rise…the secure token offering (STO). With an expected growth up to $10 trillion by 2020, the STO is emerging as a powerful and valuable alternative to private equity and venture capital financing for companies globally. It’s based on two needs: stronger regulation and the separation of speculation from the utility.
A security token can be backed by the company’s assets such as shares, the right to receive dividends or grants for voting power. This clearly provides a much more solid and safe investment for the investor who believes in the company’s future. A security token has a lot of advantages since financial regulators consider them securities. Ultimately, this protects token holders. They also mitigate the divergence of interests between project investors and project users. Finally, they give real rights to the token holders.
For PopCom, we chose a popular option for STOs – using the exemption Regulation Crowdfunding (CF), which is an offering for the general public, meaning both accredited and non-accredited investors can participate in the offering, with the caveat being that there is a limit to how much an STO can raise in a given year, the limit being $1,070,000.
By tokenizing our cap-table we now have a more flexible version of a regular securities — and blockchains offer a unique and highly-efficient medium for ownership and trading of digital tokens that can represent securities. Although the exchanges are not yet supporting the security tokens, big names like Coinbase, TZero, GBX and AlphaSwap are investing massively in the STO ecosystem and plan to open their doors in 2019.
After months of research, we selected our platform and applied to launch STO on Start Engine in July 2018, I expected to be raising money by August…I was wrong. We went through four months of compliance review and due diligence in order to be approved to raise capital from non-accredited investors under the Title III crowdfunding act. I spent months meeting with investors about our ‘upcoming round’ but due to SEC rules I was not able to disclose the terms at all until the campaign was actually live on Start Engine. After telling people ‘it’s coming soon’ for months, the campaign went live on December 19. We were relieved that we could finally start taking investments from our network and excited that despite the holiday we hit $30,000 from over 60 investors in the first few weeks. We have a huge goal of raising $943,000 in a 90-day window so our work is just beginning.
People ask me daily about the benefits of secure token offerings and the difference between a share and a token, I understand this is a lot to absorb and so new! I made it my person mission to educate founders and investors on STOs and have been documenting the journey on my Medium blog. Feel free to follow and contact me there.
(PopCom is an automated retail technology company that has built a SaaS & IoT platform for vending machines and kiosks that provides deep consumer insights and engagement for machine operators. The company is seeking investment to help solidify its strong position in the industry as well as fund new development of new blockchain-enabled software that will enable consumers to securely buy government-regulated products (e.g. pharmaceuticals, cannabis, alcohol) from vending machines and ensure retailers stay complaint.)