Mirror, mirror, on the Wall, who is the fairest ICO?

I met Neil Bergquist at SURF Incubator, a Seattle startup co-working space I called my office for a few years. He had learned of my background in crypto and alternative digital currencies, and a year or so after we met he asked my advice on setting up a Bitcoin ATM company. I suggested they aggressively pursue Money Services Business (MSB) licenses and a relationship with state regulators. I was an early E-Gold user and personal friends with Jim Ray. I had already seen firsthand what happens when this advice is ignored.

They did, and in May 2014 I got to attend the grand opening party at the Spitfire Grill of the city’s first Bitcoin ATM; possibly the first fully licensed Bitcoin ATM in the United States.

Flash forward three years, and the company is doing a Token Sale (I’m not supposed to call it an ICO, the lawyer tells me), to fund a massive expansion of their Crypto ATM network and crypto money service business across the entire United States, and beyond.

I had separately become friends with Coinme cofounder Michael Smyers. He’d come in after work to my new co-working space at the top of the Columbia Tower, and talk crazy about new things like ICOs. What’s that I asked? Only later did I realize how revolutionary ICOs really were. It was Bob Hettinga’s rambling about digital bearer assets meets the next evolution in startup venture financing (the lawyer says I can’t say venture financing).

Michael described Neil as the most competent and fair executive he had ever met. Fair almost to a fault. The perfect counterbalance to the chaos of running an engineering organization and the risks of running a monetary business. I could relate.

Which brings me to this: Why is UpToken the fairest ICO of them all?

1. None of the founders, employees, advisors, investors, or shareholders get any tokens. If they want them, they must buy them during the ICO, under the same terms and discounts as other purchasers.

2. There was no investor road show (the lawyer ways I can’t say investor). This was a huge mistake I told them. I still think that. But the answer was enlightening. Early “investors” would demand a discount versus what the public would pay. Neil thought that was unfair. Everyone should get the same deal.

If you contribute $1M or more, you get a 30% discount. If you contribute less, you still get a 20% discount on the first day. It wasn’t that discounts were unfair, but they be available to everyone on equal terms, not just the privileged insiders of Silicon Valley. Discounts to select accredited investors and advisors are the dirty secret with many ICOs.

3. The ICO is uncapped for the first 24 hours. JR Willet gave me the answer to this term. Everyone who wants to get in should be able to get in. You get a whole 24 hours, and everyone knows that. All the tokens cannot be bought up by insiders sending their money in early so they can flip them later to the unmet demand.

After 24 hours, the token sale ends on Friday or upon reaching $100M. Why $100M? Probably a number that won’t be reached, but because their funding scales. More money equals more ATMs, which cover more cities and more shopping centers. If users want a Crypto ATM close to them, contribute more money and they will come faster.

Because the ATMs pay for themselves in a relatively short period, they will multiply like rabbits, each ATM funding the next ATM. The larger the starting base population of new ATMs, the quicker the expansion.

4. They’ve created what is called a “utility token”. There is a long explanation for what that means, but in short, it means that the token may be purchased by ordinary individuals, not only wealthy accredited investors. It was a huge expense involving the best lawyers, consultants and accounting firms who specialize in this wild west arena of ICOs, to create an SEC-compliant token sale that is not an offering of securities. It was important to the company that their users be allowed to participate.

I added this point after initial publication, as someone said the fairest token would pay dividends (profits) to token holders. Yes, absolutely it would! And I look forward to the day the SEC allows companies to issue freely trading tokens that do so. Until then, token economics will not be so straight forward, so read the whitepaper.

5. The only tokens that will exist, are the tokens sold during the ICO, plus 25% of that amount held by the company in escrow. For example, if 8M tokens are sold, an additional 2M tokens are issued and held by the company (20% of the total; yes, the math works). Aha I thought! This is how the company profits directly from the token sale!

I was wrong.

There is, must be, a utilitarian purpose for the tokens; and there is. Tokens are given to ATM users on every transaction, a 1% loyalty reward. If the company did not hold tokens, it would be forced to buy them on an exchange. Fortunately, the company does hold tokens, and it gets back some tokens from its users. Users may choose to pay their ATM fee using UpToken, and get 30% discount on ATM fees when they do.

However, the escrowed UpToken only releases 20% of the amount paid back to users in the prior month, and that only after 500 new ATMs have been deployed. Which means, unless UpTokens are heavily recycled by users, Coinme will run a monthly deficit of UpToken and will buy them back from token holders on the public cryptocurrency exchanges.

Conclusion

This is not the fairest ICO. There is no fairest ICO, there are only experiments at new models of fairness. I wished to start a conversation about ICO terms and economics, not a contest.

This token sale uses its proceeds to build product; to build and deploy new ATMs. None of it provides insiders with early liquidity. This is a stark contrast to many other ICOs. I’m not saying any other specific ICO was or will be unfair or a bad deal. But it’s interesting to see each new ICO experiment with terms, until new best practices are discovered by the community.

UpToken sale begins on Monday October 16th at 8am PST.

UpToken is a utility token. It is not an investment opportunity, and is not an offer of securities. I would copy/paste all the terms and disclaimers but it is longer than this post, so go read the WhitePaper and Terms of Sale yourself and make your own decisions.

I don’t often write like this, so please share!