Initial coin offering: The easiest path to riches on the web

Online fund-raising has made it easier than ever to raise large sums

A new crop of technology entrepreneurs is forgoing the usual routes to raising money. The entrepreneurs are not pitching venture capitalists, selling stock in an initial public offering or using crowdfunding sites like Kickstarter.

Instead, before they even have a working product, they are creating their own digital currencies and selling so-called coins on the web, sometimes raising tens of millions of dollars in a matter of minutes.

The pitch is that once the products are up and running, the currencies — with names like BAT, Mysterium and Siacoin — will be redeemable for services like data storage or anonymous internet access, and could appreciate in value in the meantime.

Known as initial coin offerings, this latest twist in online fund-raising has made it easier than ever for entrepreneurs to raise large sums of money without dealing with the hassles of regulators, investor protections or accountants.

Since the beginning of the year, 65 projects have raised $522 million in these offerings, according to Smith & Crown, a research firm focused on the new industry.

It is a frothy, sprawling and completely unregulated way of funding start-ups, leaving even veteran technology watchers scratching their heads.

“It’s kind of like when you are a little kid and you know you are getting away with something,” said Chris Burniske, an industry analyst at ARK Invest. “It’s not going to last forever, but it’s fun in the interim. The space is giddy right now.”

Last month, a small team of computer engineers in Lithuania raised $14 million in 45 minutes by selling a coin, known as Mysterium, that is intended to give access to an encrypted online data service that is still being built. The next day, a group of coders in the Bay Area pulled in $35 million in under 30 seconds of online fund-raising. The coders were offering Basic Attention Tokens, which will one day work on a new kind of ad-free web browser.

Then this week, a team in Switzerland raised around $100 million for a coin that will be used on an online chat programme that has not yet been released, known as Status.

Proponents of initial coin offerings hail them as a financial innovation that empowers developers and gives early investors a chance to share in the profits of a successful new enterprise. But where some see a new method of crowdfunding online projects, critics say the phenomenon is ripe for abuse and, in many cases, a violation of American securities law.

“It’s exploitative and abusive of the investing public,” Preston Byrne, a technology lawyer specialising in virtual currencies, said about the offerings.

Last year, the first blockbuster coin offering, the Decentralized Autonomous Organization, quickly raised more than $150 million. But the project blew up after a hacker manipulated the code and stole more than $50 million worth of digital currency. A number of other projects since then have been labelled scams.

Even among supporters, many say there has been too much money pouring into unproven projects in recent months.

Fred Wilson, a founder of the venture capital firm Union Square Ventures, said he was “long term very bullish” on these new digital currencies. But he said, “We see many reasons to be cautious right now.”

© The New York Times