Kain Warwick, founder of Synthetix (SNX), thinks US regulators would have been better off refraining from initial coin offerings (ICOs).
Warwick say The US Securities and Exchange Commission’s (SEC) response to ICOs was “schizophrenic and clumsy” and generated a worse outcome for the industry than if the regulator had done nothing at all.
ICOs were initially launched more than 10 years ago to raise money by promoting a new cryptocurrency venture to retail investors. The SEC finally cracked down on ICOs in 2018, saying the practice of raising money through token sales may violate securities laws.
By quashing ICOs, Warwick believes the SEC has given more power to venture capital funds that launched coins at a higher valuation, making it riskier for retail investors to get in.
“Today, the discount between early rounds and the price a token trades on exchanges is probably closer to 95%. Or to put it more clearly: early investors used to earn twice as high returns as private investors. Now this is closer to 20x and on some projects it can even be 100x or more.”
Warwick also says that new crypto projects are having a hard time getting started due to limited liquidity from venture capital funds.
“This is why I believe this market disruption is largely the SEC’s fault. By ending the ICO, they have shifted the risk profile of crypto projects. Now, early-stage projects are being forced to raise at a fraction of the price they are likely to reach at the token launch.
The reason is that the risk profile and liquidity profile are much worse in a venture capital structure. If you know you won’t have liquidity for three to four years, you should take a much larger discount than you would otherwise demand in a seed round.
ICOs were essentially public seed rounds. All the capital the project was expected to require was raised in advance. This is a high-risk play, but the immediate availability of liquidity offsets much of the risk.
Frankly, most projects that make it through multiple rounds of venture capital funding are less likely to be a straight-up carpetbagger or a scam. And therefore it is less likely to go to zero. But I would say that the market became better at distinguishing good projects in early 2018.”
Warwick argues that regulatory clarity “isn’t coming” and suggests that crypto projects are taking risks and dedicating a large part of their offering to retail investors.
“Airdrops are a nice gesture, but 5% of the supply doesn’t really change.
The first few projects that decide to do a big sale early will build a huge following and I think this will change the narrative. Clearly no American project will be crazy enough to do this (please prove me wrong).”
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