Data & Analysis

ICOs: Toronto‑based Tech VC, Information Venture Partners Weighs In

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As far as cryptocurrencies’ go, Bitcoin is probably the most commonly known. Bitcoin surfaced in 2009 by an unknown person or people under the pseudonym Satoshi Nakamoto, which stimulated mystery and intrigue in the digital payment system.

Operating without a central repository or single administrator, the currency spawned some concern about criminal activity through media and financial regulators. With increased popularity and the potential to throw a wrench in traditional payment systems, several regulators, including Canada’s, began exploring ways to protect the currencies’ users.

On August 24, the Canadian Securities Administrators (CSA) published a notice regarding Cryptocurrency Offerings (ICO). In the notice, the CSA provides guidance on the CSA’s views on the applicability of Canadian securities laws to ICOs and the sale of other cryptocurrencies such as Ethereum, Bitcoin and a laundry list of other available currencies.

According to an update from Goodmans LLP, ICOs have quickly become a significant source of funding for early stage tech companies, fueled by the lack of oversight and being that up until recently, they haven’t been deemed securities requiring traditional securities law requirements. ICOs have been growing exponentially, and are in some cases even outstripping traditional forms of venture capital — by more than threefold.

In the CSA notice, the regulator makes it clear that cryptocurrencies can qualify as securities and, if so, any distribution of such securities in Canada must comply with fundamental Canadian securities law requirements. The CSA also published a new guide through the Ontario Securities Commission (OSC) for investors planning to use cryptocurrency.

Provided the fintech community is directly implicated by this notice, the CVCA caught up with fintech venture capital investment firm, Information Venture Partners, to understand their viewpoint on the topic and to better understand the impact of this announcement, both on investors and the fintech companies themselves.

Q: To start, what is the viewpoint of Information Venture Partners on cryptocurrencies?

A: As B2B fintech and enterprise software investors in series A and later stage opportunities, we have not seen very many ICOs for these types of companies. While for us it is too early to tell whether this is a sustainable source of alternative financing, we have seen B2C companies like Waterloo-based Kik Interactive proposing offering its own token. Kik plans to use an in-app currency” for the transaction and consumption by its vast community of users to bolster engagement and increase overall utility of the Kik platform.

In this case and others, to the extent users who hold the token pertaining to the ICO actually use it to generate further value to the technology or product (as opposed to holding it just to flip it on an exchange), we think this could be of great value to a startup. Therefore, the success of a token is a derivative to the success of a startup’s enterprise value.

For the time being, we will continue to invest in a startup’s traditional share capital given its most directly tied to the value of an enterprise, and contains protections and other provisions our own limited partners expect us to have in a venture investment.

Q: As a VC firm regularly investing in fintech, what is your general opinion towards the recent notice on cryptocurrency offerings?

A: We think that increased clarity and promise to protect the general public by facilitating transparency is key. Because ICOs are still new and an emerging financing options for many people, we would like to emphasize how many of these tokens may be misconstrued by the broader public as traditional equity investments — which they are not. Even with the CSA notice, it is not completely clear yet.

So, there is still more work that needs to be done to ensure that the average individual who is investing in an ICO has an adequate understanding of what they are allocating capital towards, as well as the risks and benefits.

Q: From Information Venture Partners perspective, what impact do you think the CSA’s notice will have on competitiveness of emerging Canadian fintech companies?

A: Token sales are another funding source for entrepreneurs to help grow their business outside of the traditional funding options. However, much like an entrepreneur needs to know the laws and rules of engagement in their day-to-day business, entrepreneurs need to legally know how they can fund their business to best plan and optimize for their investors’ and their own needs.

Q: When do you think ICOs will be adopted by fintech VC funds?

A: It’s still early in the game surrounding ICOs, however, they have started to gain real popularity. We have seen various companies receive over $250M of funding via ICOs since 2015 (this includes the failed DAO project) and in Q12017, 37 per cent of all blockchain funding (not just early stage) came through ICOs.

That said, we can see a trend that is beginning to happen around individuals participating in ICOs, but it has not reached a mass adoption yet. To that point, VC funds need liquidity, and need to be comfortable that liquidity exists. With the new regulations, we think there will be additional clarity around these offerings and with more clarity there will come further adoption by the VC community.

If you have any additional thoughts or comments on the topic of cryptocurrency offerings, please contact the CVCA’s editorial department here.