Reverse ICOs: Transforming Corporate Fundraising with Distributed Ledger Technology

ICO LAUNCH MALTA

Nov 18, 2018

Established Company + ICO = Reverse ICO
Question: What happens when a corporation realizes that distributed ledger technology provides both a competitive advantage and a fundraising opportunity?
Answer: The company does a Reverse ICO.

Introduction

Reverse ICOs represent the convergence of an established company and an Initial Coin Offering (ICO).

Reverse ICOs offer a unique opportunity for established companies to combine their existing operations with the benefits of Initial Coin Offerings (ICOs). By leveraging tokenization, decentralized networks, and smart contracts, established companies can tap into the potential of distributed ledger technology and discover a new avenue for fundraising.

This article will explore the fundamental principles, advantages, and considerations associated with Reverse ICOs.

Benefits of a Reverse ICO

A Reverse ICO leverages the tokenomic framework of distributed ledger technology (DLT) to enhance existing business models and provide a more cost-effective and efficient path to liquidity.

Issuers:

The legitimacy of the token offering is easily assessed, leading to increased trust among potential investors due to enhanced legal and fiscal transparency.
Integrating the current billing system with blockchain payments offers faster transactions, enhanced privacy, reduced fees, and lower ancillary costs.
Reverse ICOs enable democratized self-governance and seamless alignment of incentives among various stakeholders.
Leveraging the network effect becomes easier for established products or services supported by an experienced team and an existing user base.

Investors:

Investors benefit from the existing human capital and operational infrastructure, including accounts receivable, logistics, legal compliance, and customer support, resulting in an improved value proposition.
Repurchasing regular stock from stockholders and reissuing it as tokens representing preferred, common, or a new class of equity provides investors with governance rights and a stake in the company's future profits.

Reverse ICO vs. IPO

Startups do traditional ICOs, whereas profitable companies do Reverse ICOs.

Key differences between a Reverse ICO and an IPO:

Ownership Tokenization: Reverse ICOs issue tokens representing ownership in the company, whereas IPOs issue traditional shares of stock.
Logistical and Legal Complexity: Reverse ICOs involve fewer logistical and legal complexities than IPOs.
Regulatory Environment: IPOs are subject to rigorous regulations, while ICOs have relatively fewer legislated regulations, especially outside of Malta. However, it is essential to acknowledge that some ICOs in the past were based on unrealistic promises, leading to fraudulent activities.
Funding Nature: Reverse ICO funding can be comparable to late-stage venture capital or private equity growth funding, whereas IPOs typically serve as exit events funded by public equity.
Compliance and Cost: Compliance checks can be built directly into tokens, resulting in lower costs than an IPO's KYC/AML processing and associated legal and accounting requirements.
Valuation Impact (contrasts with the role of financial institutions in driving IPO stock trades): Reverse ICOs may lead to a higher company valuation due to their faster and more cost-effective liquidity distribution. Additionally, Reverse ICOs benefit from the enthusiasm of individual supporters participating in a tokenomically optimized ecosystem.
Customizable Smart Contracts: Tokenomic smart contracts enable the inclusion of preferences, clauses, rights, and privileges that are impossible to grant in a traditional equity offering.

Communicating the Advantages of a Reverse ICO to Stakeholders

By embracing a Reverse ICO, a company and its investors can unlock new opportunities for growth and liquidity while benefiting from the unique advantages offered by tokenization and blockchain technology.

Below are some of the key points to emphasize when presenting the Reverse ICO opportunity to a company's board of directors and investors:

Early adopter benefits: Highlight how embracing a Reverse ICO allows the company to stay relevant in a rapidly evolving technological landscape and demonstrate its commitment to blockchain innovation.
Funding for dedicated departments: Emphasize that Reverse ICO proceeds can be allocated to establish specialized teams focused on blockchain technology, marketing strategies, and technical and legal support.
Positive impact on long-term valuation: Explain how the inherent efficacy of blockchain technology enhances the company's long-term valuation potential, attracting investors who recognize the value of distributed ledger solutions.

Kik's Reverse ICO

Canadian messaging app provider, Kik, raised an impressive $98 million through a Reverse ICO, marking a significant turning point for the company.

Faced with the formidable competition of Facebook Messenger and WhatsApp, both backed by Facebook Inc., Kik found itself struggling to keep up. As a secondary player in a market monopolized by tech giants, Kik had limited options and sought a compelling new strategy.

Previously reliant on ad revenue, Kik recognized the need to shift away from the traditional model and explore the potential of blockchain technology. With its Reverse ICO, Kik aimed to transition from an ad-supported revenue model to a blockchain-based approach.

Kik introduced its native Kin token, distributed as incentives based on user activity, onto its blockchain network. This move opened up opportunities for developers to create innovative business models within Kik's tokenomic platform, offering new avenues for growth and revenue generation.

In the highly competitive consumer tech industry, a few dominant players reign supreme while smaller companies struggle to find their footing. However, Kik managed to challenge Facebook's near-monopoly, garnering millions of users from 130 countries to support its blockchain network. This accomplishment highlights the potential of Reverse ICOs as a disruptive force within established markets.

Conclusion

Anyone dismissing ICOs as a fad, irrelevant to VC and IPO fundraising overall, will have to think twice about that conclusion with the advent of the Reverse ICO and its potential to disrupt the status quo. The Reverse ICO model removes the primary weakness that causes traditional ICOs to fail: they are managed by startups (almost always over-confident and frequently self-deluded) lacking a viable product and market experience. At the same time, the Reverse ICO model capitalizes on the ICO model's crowd-fundraising strengths and network leveraging effects.

Blockchain-based assets may well end up in portfolios of ICO naysayers as public companies acquire private companies through Reverse ICOs. Reverse ICO token holders may emerge as a new class of investors that more directly benefit from corporate wealth creation. If the value of stock equity declines in a world where token sales start to pay off with higher returns, the Reverse ICO may soon emerge as a mainstream funding vehicle.

Update, June 2020:

Kik faced significant challenges in achieving its blockchain goals. Following its Reverse ICO and the launch of its native Kin token, the company faced legal hurdles from the U.S. Securities and Exchange Commission (SEC). The SEC alleged that Kik's ICO constituted an unregistered securities offering.

In June 2020, Kik settled with the SEC, agreeing to pay a $5 million fine without admitting or denying the allegations. The settlement constrained Kik's ability to develop the Kin token ecosystem further. Additionally, Kik announced its decision to shut down its app in October 2019, citing the ongoing legal battle and a desire to focus on the Kin cryptocurrency.

ICO Launch Malta

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ICO Launch Malta provides tailored ICO and STO solutions to startups and established companies seeking funding and exchange listings.

Our in-house blockchain developers specialize in creating cryptographic equivalents of traditional financial instruments.
Our marketing team excels at below-the-line marketing and crafting compelling narratives to optimize fundraising outcomes.
Our expertise extends to tokenizing various assets, including art collections, fractional real estate projects, asset-backed offerings, investment funds, and blockchain bonds.
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Jay Derenthal