Published on December 27th, 2017 |
by Michael Barnard
December 27th, 2017 by Michael Barnard
Blockchain is hot right now, perhaps at the peak of its hype cycle, perhaps not. It is the underpinning of bitcoin, but also has the promise to be a disruptive technology in multiple sectors. Now it’s time to look at cleantech funding in more depth.
I started my exploration of how it will impact electricity’s transmission, distribution and sale in Bitcoin’s Hot But Blockchain For Cleantech Is Interesting, continued in a 3-part series of articles on the nature of smart contracts based on blockchain technology and their applicability to electrical generation and distribution and most recently explored 5 use cases for blockchain in the cleantech space.
All of the articles can be found in CleanTechnica’s special cleantech blockchain site.
This article will look how initial coin offerings and other blockchain-related funding models can be used for cleantech ventures. Foreshadowing: while originally it was an unregulated space, securities agencies are increasingly applying regulatory frameworks to it and tax agencies are increasingly looking for their cut.
Initial Coin Offerings (ICOs)
These are the IPOs of 2017, and like the dot-com IPOs of 2000 they are raising money incredibly quickly and often based on the thinnest of premises of future revenue. It’s a highly speculative area.
But it is an area where cleantech has raised some significant money.
- Power Ledger is building a peer-to-peer blockchain energy-trading system. It raised $34 million AUD in an ICO in 2016.
- Grid+, which is building an app and home appliance which expose electricity costs, help reduce usage and arbitrage the most economical use of local renewables, storage and grid electricity sold 39 million tokens with a value of $32 million in its ICO in 2017.
- WePower, which is building a blockchain platform to allow renewable projects to get funding. raised $3 million in its public pre-ICO with the formal and full ICO coming in February 2018.
- Solar Bankers, another micro-grid startup with interesting solar-film technology, relocated to Singapore from Arizona and is running an ICO with a goal of raising $300 million. History suggests that they’ll get less than that, but they’ve sold over 25 million of their SunCoins to over 1,600 contributors so far, over 25% of their hardcap.
That is all money flowing in the form of cryptocurrencies, and the value fluctuates so rapidly and so much that pegging a specific amount to it is challenging. Bitcoin is the most famous example of this, with its value against the US dollar fluctuating from around $3,600 three months ago to a high of over $19,000 before dropping in the past week to around $14,000. Ethereum has risen from around $280 to a peak of about $850 before dropping to around $650 over a similar period.
It does beg the question about whether the money-raising firms have kept the proceeds in cryptocurrency or hedged by moving a fair amount of it to fiat currencies.
Executing an ICO
When raising money through a coin offering, most groups don’t create their own version of bitcoin or Ethereum. Instead, they typically leverage Ethereum’s blockchain and smart contract programming language to create something referred to as tokens. A token is like a share. Ethereum isn’t the only blockchain platform around, but it is the most widely used. Solar Bankers, as an exception, is using the new SkyLedger blockchain platform.
A key initial part of an ICO is a whitepaper articulating exactly what the new coin is supposed to do, what the money will go toward and how the ICO will be executed. The smartest ones translate the whitepaper into multiple languages, as Power Ledger did.
ICOs are open for periods from a week to a month and individuals ‘invest’ by purchasing tokens. There are a handful of models for recouping the investment, but the primary two are increases in the market value of the tokens and dividend approaches which return a fraction of the profit from the business venture back to token holders.
There are various guides to ICOs out there, but remember that this is a new space, there is no certification or education that particularly applies and there are a lot of self-appointed experts, including me.
Taxes and regulation
Until recently, ICOs were considered a form of crowd-funding, a specialized form of Kickstarter or Patreon. This has allowed groups running ICOs to avoid the heavy regulatory burden related to securities. However, there have been moves by the US SEC and other countries’ equivalent organizations to start characterizing ICOs as securities sales.
This has pros and cons for the individuals running them. If an ICO is a securities sale, then the proceeds are consider debt or equity and hence not taxable in most jurisdictions. If revenue is expected to start flowing in future years, then they have capital to execute on their business plan without a tax burden. But conversely, if they are securities, then they fall under the fairly restrictive and certainly complex security regulations framework which is intended to protect investors and prevent fraud.
The alternative, which many ICOs attempt to do by careful choice of language, is to have the proceeds characterized as income or corporate revenue instead. This avoids the regulatory burden, but the flip side is that most countries want the taxes from that money, and those taxes are due for the tax year in which the ICO occurs. Some sources suggest performing an ICO early in the tax year is advantageous, presumably because the organization has use of the money for potentially more than a year before having to pay taxes. In rapid startup growth plans which have revenue early, this can be viable.
To avoid regulatory and tax burdens, many ICOs choose their country as carefully as they choose their blockchain base. Given that cryptocurrencies are inherently without country and every regulatory experience is new, this is more reasonable than with IPOs, where both currency and IPO experience in a specific country matter more.
Sidebar: In the first article I mentioned the post-Westphalian nature of cryptocurrencies. It’s worth elaborating on that slightly for the purposes of this discussion. The Peace of Westphalia was a series of treaties signed in 1648 which formally ended both the 30 Years War and the 80 Years War, which were both Catholic vs Protestant wars and a war between the Roman Empire and a bunch of mostly Protestant nations.
The important point is that the treaties embodied a set of principles about what sovereign nations were, something which has become known as Westphalian Sovereignty. That concept says that nations have complete say within their borders, weren’t supposed to interfere in other nations’ internal affairs and that all nations are equal, even the smallest. One of the elements of national control which emerged from this was a specific monetary unit developed and managed by the country.
ICOs aren’t the only game in town for cleantech entrepreneurs and investors. Two other models deserve attention.
Lessons for cleantech entrepreneurs
This is far from a complete list, but it’s a reasonable starting list. ICOs aren’t get-rich-quick-schemes that succeed in a weekend. They take work, thought and planning.
- Consider one of the alternative models, but don’t forget that they may be just as subject to taxation and regulation.
- Incorporate prior to ICO. Among other things, this means that individuals associated with the venture won’t pay taxes until they receive proceeds from it, whether as capital gains or income.
- If you are a US company, consider a corporate structure that is arguably foreign with some US stakeholders, not a US entity in a foreign country with dominantly US stakeholders.
- Spend time thinking about the jurisdiction to base the ICO in.
- You can disintermediate venture capitalists with an ICO, but you can’t get rid of lawyers and accountants with them.
- Right now, ICOs are the wild west, more like a penny stock with much bigger numbers and there is a lot of fraud in the space. Regulators are moving in to protect investors.
- While cryptocurrencies are post-national, non-fiat currencies, nations are looking to take their cut.
- Cryptocurrencies are great, but most people who work in the real world need fiat currencies as payment, so banks that allow proceeds from cryptocurrencies are critical. Having millions is no use if banks refuse to process it.
- Just like an effort leading to an IPO, you have to set up a team, invest in intellectual capital, make credible projections of results, establish a plan, create a pitch and then launch the quest for capital.
As always, I’ll be watching the comments closely. If you know of additional cryptocurrency funding examples for cleantech or I’ve made a mistake, let me know.