Synthetix (SNX) founder Kain Warwick thinks US regulators would have been better off steering clear of initial coin offerings (ICOs).
Warwick says the U.S. Securities and Exchange Commission’s (SEC) response to ICOs was “schizophrenic and bumbling” and generated a worse outcome for the sector than if the regulator hadn’t done anything at all.
ICOs were initially launched more than 10 years ago to raise funds by promoting a new cryptocurrency venture to retail investors. The SEC eventually cracked down on ICOs in 2018 and said that the practice of raising funds through token sales may be violating securities laws.
By crushing ICOs, Warwick believes that the SEC gave 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 in a more obvious way, early investors used to have a 2x higher return than retail. Now, it’s closer to 20x and can be 100x or more in some projects.”
Warwick also says that new crypto projects are having a lot of trouble getting started because of the limited liquidity coming from venture capital funds.
“Here is why I believe this market distortion is largely the fault of the SEC. By killing the ICO, they shifted the risk profile of crypto projects. Now early-stage projects are forced to raise at a fraction of the price they will likely achieve at token launch.
The reason is that the risk profile and liquidity profile are far worse in a venture-style capital structure. If you know you will have no liquidity for three to four years, you have to get a far larger discount than you’d otherwise demand in a seed round.
ICOs were basically public seed rounds. All capital the project… expected to require was raised upfront. This is a high-risk play, but the immediacy of liquidity offsets a lot of the risk.
In fairness, most projects that make it through multiple rounds of VC funding are less likely to be an outright rug or scam. And therefore less likely to go to zero. But I’d argue the market was getting better by early 2018 at distinguishing good projects.”
Warwick argues that regulatory clarity “is not coming” and suggests crypto projects take risks and devote a big portion of their supply to retail investors.
“Airdrops are a nice gesture but 5% of the supply doesn’t move the dial really.
The first few projects that decide to go for a big retail sale early are going to build a massive following and I think it will shift the narrative. Obviously, no US project is going to be crazy enough to do this (prove me wrong please).”
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