Aaron Kaplan, securities attorney and COO of Prometheum, is guest author for this Opinion/Editorial.
Initial Coin Offerings (ICOs) have become the investment du jour while the understanding of what ICOs are has become desperately convoluted. Every huckster, scammer and opportunist has tried to hop on the bandwagon. (I’m talking to you, Casey Ryback) Many of these ICOs were a means for scammers to raise money over the internet from unsophisticated investors whose “FOMO” outweighed the obvious red flags associated with such offerings.
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Identity Crisis for Initial Coin Offerings
The rapid growth of the ICO industry ($6+ billion) and the inherent scams and related investor losses forced the SEC to consider ICOs in the context of the Federal Securities Laws (FSLs). The SEC’s recent broad subpoena sweep marked the SEC’s official declaration that ICOs are securities. Now that ICOs must comply with the FSLs, it should come as no surprise that a new type of trickster is trying to hijack the innovation through either a) selling illiquid tokens to wealthy investors or b) selling traditional securities that are registered on a blockchain.
To set the record straight, and provide much needed clarity, here is a condensed description of ICOs and their intended benefit. ICOs are an innovative means of capital formation. Issuers offer a securitization of user interest in an ecosystem as an investment to the general public. Assuming the issuer has reasonable token economics, then the greater the user interest in the ecosystem, and the utility of the underlying token, the more the value of such token should increase. It’s supply and demand, but the price is not reflected in the common stock; rather, it is reflected in the cryptographic token representing the user interest.
Aaron Kaplan
Furthermore, an ICO should have two key features:
1. It should be available to the general public, and
2. It should be able to freely trade on the secondary market when the token is issued.
The securities of ICOs to date have not and cannot achieve both those goals. Such securities are illiquid and only available to accredited investors/institutions.
As the industry matures through compliance with all relevant rules and regulations, I fear we are losing the spirit of ICOs, which some argue may not be sustainable under the FSLs.
Issue 1: Reg D/SAFT ICOs
The Filecoin Reg D token offering in mid-2017 was an important point for honoring the Federal Securities Laws. Reg D ICOs raise capital with proper offering documents (a requirement under the FSLs) by selling tokens that have proposed utility in an ecosystem. While such ICOs are legal by nature, companies conducting ICOs in a Reg D (or a SAFT) offering forgot how an ICO was supposed to function.
These Reg D and SAFT ICOs inherently contradict the spirit of an ICO- a token sale that should be open to all investors (both accredited and non-accredited), and freely trading in the secondary market. Reg D and SAFT issuers’ token sales are only open to accredited investors (i.e. wealthy individuals and institutions) and are restricted securities (meaning they can’t trade freely on the secondary market until the issuer files current public information and essentially registers such securities with the SEC).
These issuers, while understanding that ICOs are securitizations of user interest, missed the mark. Their ICOs are illiquid and limit participation to the wealthy. Investors won’t have the ability to trade those tokens, and are stuck with illiquid (untradeable) securities that have the same issues as those associated with traditional venture funding – waiting for a buyout event or going public (which is extremely rare) before investors can realize a return on their investment.
Issue 2: ICOs vs. Traditional Securities Issued Over a Blockchain
Opportunistic companies are also trying to use the concept of an ICO, turning an innovative method of monetizing an ecosystem into a cheap marketing ploy. The most frustrating example of this practice are companies who say they are raising capital for an ICO, but in reality they are just issuing traditional equity or debt securities that are represented by a cryptographic token. These aren’t ICOs, but rather traditional securities registered (like a transfer agent’s log) over a blockchain. While many (including me) believe blockchain securities are the future of securities ownership, a preferred equity token is not an ICO. It is a traditional security that is issued over a blockchain.
Securities issued over a blockchain MUST be distinguished from ICOs. An appropriate definition of an ICO in 2018 is the following: an ICO is a securitization of user interest. It is not a debt or equity security, but rather a new type of security – an investment whose value is related to the user’s interest in an ecosystem and the utility of the actual token in that ecosystem. It is essential that the industry understands the difference.
In late March, a company tried to issue a blockchain security for a building. Such cryptographic tokens represent ownership in the building and trade over blockchain. That is a traditional Reg D security, and not an ICO. The company received news coverage for being the first company to sell interests in a building using a blockchain. However, many companies have sold interests in real property online. This company is doing the same thing – basically putting lipstick on a pig.
So how do we define an ICO?
ICOs are innovative ways to unleash/monetize potential value from the user interest in an ecosystem. ICO tokens represent a new type of security whose value is related to the user appetite in that ecosystem (daily average use, recurring use, etc.). Ideally, an ICO should be available to all types of investors (accredited and non-accredited) and be freely tradable when the underlying network goes live.
With ICOs officially coming under the FSLs regime, the industry should take a moment to reflect on what an ICO is and will be under the FSLs before it morphs from a genuine innovation into a marketing ploy.
This is an Op-ed article. The opinions expressed in this article are the author’s own. bitcoin.com does not endorse nor support views, opinions or conclusions drawn in this post. bitcoin.com is not responsible for or liable for any content, accuracy or quality within the Op-ed article. Readers should do their own due diligence before taking any actions related to the content. bitcoin.com is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any information in this Op-ed article.
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According to , a market intelligence firm, the number of players will further grow to almost three billion by 2021, with global revenues surpassing $180 billion. Thanks to increased exposure, the number of people aware of eSports, a growing sector within the industry, is expected to reach 1.6 billion in 2018, while the enthusiast community will comprise 165 million of the total and grow to 250 million by 2021.
Together, these trends are shaping the future of the eSports betting market. In fact, it is possible that it is now larger than the entire eSports industry. According to software analytics company Narus and industry research firm Eilers & Krejcik Gaming, the market has almost $6 billion wagered on video game titles in 2018, and this will expand to $13 billion by 2020. Here, we explore the key drivers of the eSports betting market and provide a brief overview of its landscape.
The Introduction of New Leagues and Participants
Historically, eSports struggled to gain traction until approximately 2010. As the number and size of professional competitions grew, so did viewership and sponsorships. Today, with multi-million-dollar prize pools, eSports tournaments continue to rise at a meteoric pace. For example, the International 2017, an annual Dota 2 tournament, featured a prize pool of $24.7M. In turn, other video game titles such as League of Legends, StarCraft II, and Counter-Strike: Global Offensive have their own leagues and tournaments, boasting massive eSports betting volumes.
Less visible to the outside world, eSports betting has become a robust market. With over $5.5 billion already wagered on major game titles this year, existing tournaments, followed by the introduction of new competitions, will continue to be the crucial factor behind its expansion.
Moreover, new video game entrants such as PlayerUnknown’s Battlegrounds, Amazon’s Breakaway, and the Overwatch League, together with real-world sports companies starting to partner with tech giants like EA Sports, will further drive growth and increase interest in the eSports betting market, making it more technologically advanced and bigger than ever before.
Improved Technology
From better betting performance to enhanced user interfaces, there are constant attempts to devise more innovative technological solutions to improve the online betting experience. Today, tech startups such as and are trying to tap into the lucrative eSports betting market by replacing traditional betting sites with next-generation services and platforms.
The former is a full-fledged wagering service that provides a single place to track stats and bet on eSports with Unikoin, a platform-specific virtual currency, while the latter is designed to help users improve their betting experience and make educated decisions by deploying Merlin, a built-in assistant with Big Data capabilities.
In fact, Bettium’s Merlin will be a pioneering AI system that predicts outcomes and executes betting strategies based on real-time eSports-related content analysis, and the company hopes it will replace the online sports book model with a more responsible alternative and will level the playing field between professionals and amateurs.
These startups – as well as other betting companies – will continue to introduce improved technology, as well as new standards for functionality and reliability, that will transform the way online betting is perceived, opening the market up for more and more players, advertisers and investors.
The Effect of Regulation
In the US, eSports betting companies continue to face regulatory challenges, as betting on competitive video game tournaments is still subject to the same vague loopholes as real-world sports betting. Now, though, with the Professional and Amateur Sports Protection Act being reviewed by the Supreme Court, there’s potential for a ruling that would make sports betting – and hence the eSports betting services – completely legal in all states that decide to allow them and create the necessary regulatory framework.
Such a move would mean a windfall for Unikrn, Bettium and other eSports betting startups, especially those working with major sports leagues such as NBA, NFL, and MLB, while catalyzing the growth of the entire betting market.
In other countries where sports betting is permitted, policymakers have generally accepted the idea of treating eSports the same way they treat any other sport, but licensing remains an incredibly complex topic. Indeed, given the legal uncertainty, banks often view eSports betting startups with caution and can be reluctant to provide proactive service and support.
On the other hand, there is an emerging wave of Blockchain-based startups entering proof of concept stage across the market. By design, the Blockchain technology – which allows for decentralized banking, tamper-proof record-keeping and identity verification – will give them the flexibility that they need to meet customers’ expectations, even in a highly regulated environment like the UK and the EU.
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