What is a reverse ICO?
A Reverse Initial Coin Offering (ICO) is a method used by existing and established real-world businesses to issue a token to decentralize their ecosystem, raise funds, and enter into cryptocurrency. These companies have existing products and services and serve real-world customers.
Essentially, a reverse ICO acts as a initial public offering (IPO) allow an existing company to launch cryptocurrency tokens and seek funds through collective collaboration. In the last two years, this similarity has led the US Securities and Exchange Commission to argue that token issuances through reverse ICOs are securities and not coins.
- Reverse ICOs are token sales issued by companies that are already up and running, in contrast to traditional ICOs that raise funds for a startup for the first time.
- During the height of the crypto bubble in 2017, reverse ICOs seemed like a way to raise capital without government oversight.
- The US SEC restricts the definition of what can be an unregulated ICO and what is an IPO by another name.
Understanding reverse ICOs
The process for a reverse ICO works exactly the same way as for a reverse ICO. standard ICO. The only difference is that the company issuing the token is already well established and offers a crypto token for sale to raise cash.
The use of these tokens as money is somewhat dubious, as reverse ICO companies were able to grow and prosper using conventional fiat currency, and the possibility of each company asking you to convert your fiat money into their proprietary token, as if it were required to load your Starbucks gift card before you were allowed to purchase a cup of coffee, impractical to say the least.
Another problem with reverse ICOs is how to understand their tokens. Are they a medium of exchange or are they securities? This was the problem messaging app Kik had when it launched a reverse ICO in 2017 that raised $100 million.
The US Securities and Exchange Commission filed a lawsuit against Kik alleging that it misled investors because its reverse ICO was really just another form of security like a stock. But unlike a stock, there is no return on investment in Kik’s coin, Kin, which is listed at the end of 2020. 95% below its reverse ICO price.
Reverse ICOs: a fad during the crypto bubble
During the height of the crypto bubble in 2017 and 2018, companies that said they were adding blockchain to their businesses increased in value. One notorious example from early 2018 is Long Island Ice Tea Company, which changed its name to Long Island Blockchain and saw a 500% increase in the value of its Nasdaq-listed shares. (It has since been removed from the list.)
Because existing companies face regulatory hurdles if they want to raise capital by selling shares and banks often have strict requirements for companies to prove their good credit and viability, the reverse ICO seemed like an easy, unregulated way to raise money. with few conditions and without supervision. The temptation to do so was even stronger when spoof coins like PonziCoin openly warned investors that the ICO was a scam still in place. an estimated $250,000.
The SEC even went so far as to create a fake ICO page selling a makeup shit coin called Howeycoin, a play on the Howey test used by the SEC to determine what constitutes a security, to teach unsuspecting investors to read the fine print before investing. The agency’s ongoing (late 2020) lawsuit against Kik may be one of the reasons why the reverse ICO market has dried up since the crypto bubble burst.
The future of reverse ICOs
However, the possibility of a reverse ICO is not entirely dead; although Facebook’s reverse ICO proposal for its Libra token met resistance from states and central banks when it was announced in 2019; and as of 2021, it looks like the pound project seems to have been postponed indefinitely.
Other organizations may also find value in creating a blockchain-based token system that doesn’t appear to be an illegal or legally gray attempt to circumvent securities regulation, but the appeal of reverse ICOs as they existed in 2017 has faded.