Innovators in the initial coin offering (ICO) sector appear to be stepping up efforts to target an increasingly interested institutional market.
While professional investors and money managers have historically struggled to gain exposure to the Wild West of token sales and ICOs, work is now underway to create new offerings geared toward not only this audience, but the evolving regulations that both buyers and sellers must abide by.
In short, a strategy pioneered with the launch of the first token designed specifically as a security, VC firm Blockchain Capital's pioneering BCAP token, is showing signs of further adoption.
Using the same investment bank, California-based Argon Group, Protos Cryptocurrency Asset Management announced a plan last week to launch an ICO via a Regulation D placement that would see it collecting funds for a cryptocurrency hedge fund.
And industry analysts see a simple reason why - the increasing specter of regulatory action runs the risk of muting the outsized returns that have heightened the market's exposure.
Brad Chun, CEO of blockchain startup Mooti Digital Identity, sees this as a smart and necessary way to appeal to investors, given regulatory risk. Not only has the SEC indicated that issuers could face liability for disseminating tokens deemed securities, but regulators in China have gone so far as to demand that businesses selling them halt forthwith and refund customers.
Chun told CoinDesk:
"There are zero technical or operational advantages. The only advantage is possible compliance with jurisdictions and laws which might deem various activities illegal if these steps aren't taken."
The end result according to Petar Zivkovski, an executive at trading platform Whale Club, is that a regulated strategy, while onerous, better protects investors and innovators.
"[It] protects their team legally, and they appease the minds of their potential customers by certifying that they are not fraudulent," he said.
And the growing use of private placements like the Reg D structure is something investors should note. Namely, it means that the next generation of tokens could be securities in the view of U.S. regulators.
Token for tokens
And striking this balance between returns and regulation is key to the Protos offering, according to both its founders and the advisors managing the offering.
Protos will be used to invest exclusively in other cryptocurrencies and tokens. Further, the fund's investments will broadly fall into three buckets: active investment, arbitrage and ICO investment.
According to Protos, their active investment strategy involves making what are essentially momentum bets on market price movements. The arbitrage strategy will revolve around purchasing and selling tokens on different exchanges as close together as possible, in order to benefit from price discrepancies across exchanges.
Since liquidity is an issue in token markets, Protos plans to focus on trading the largest tokens, especially where the market capitalization is above $1 billion.
Philipp Kallerhoff, who will run trading operations at the Protos venture explained it will also build a database, where they can analyze various token metrics, with the goal of building fundamental measures for data-driven trading strategies.
Such tools, he reasons, will become more valuable as the market calms down and large returns in more developed assets become less likely.
Pros and cons
There are, of course, trade offs when issuing private placements.
CoinDesk also spoke with Emma Channing, who serves as General Counsel and interim CEO of Argon Group, the investment bank that managed the issuance for Protos. As Channing points out, issuing a Regulation D private placement requires that the purchasers must be accredited investors, which, in the U.S., means that they must have a minimum net worth of $1,000,000, or have earned $200,000 a year for the last two years.
Restricting the list of potential investors in a token offering to those who meet the accredited investor requirements restricts the number of people who can purchase the token. Such restrictions may influence how the token offering is received by buyers, especially considering the open-source roots of the cryptocurrency world.
While Chun said there are benefits from regulation when the guidelines help ensure honest business practices, he generally draws a hard line against the trend towards securitization.
As such, his statements set up what could be an interesting trend ahead - that new tokens turn off the retail investors that have helped build up the nascent market.
"I'm against regulations in general because they add additional burden to be borne by both the investor and the company. In most cases, it restricts investors from specific jurisdictions or ones below a specific income or accreditation level.
Coins image via Shutterstock