First Stage Investor: Issue No. 17

Why You Cannot Afford to Ignore ICOs
New Recommendation: StartEngine

By Andy Gordon, Co-Founder, First Stage Investor

If you had asked me last month if I liked the upside of high-quality initial coin offerings (ICOs), I’d have said, “Absolutely.”

Today, my response would be even more emphatic. I’ve gone from “ICOs are investment-worthy” to…

“I don’t care who you are or what your investment goals are, you cannot afford to ignore ICOs.”

Especially if the investment doesn’t force you to pick ICO winners.

It’s why I like StartEngine, a company that helps entrepreneurs raise capital from the public and helps the public access extraordinary investment opportunities from startups and ICO companies.

Why ICOs Pack Abundant Upside

It may sound like it’s FOMO – fear of missing out – at play here. But I assure you, it’s not.

Not investing in the ICO space is tantamount to never saving for your retirement…

Inexcusable and avoidable. Utterly irresponsible investor behavior.

Unfortunately, plenty of people will give ICOs a pass. They’re not the easiest opportunities to figure out. (That’s where Adam and I come in, of course.)

Some investors might think they’re too risky or that they’re a passing fad. Others avoid them out of ignorance or laziness. That’s a big mistake.

But the very fact that you’re reading my advice right now is a good sign. It means you have an open and curious mind.

So listen very carefully to what I say next…

The financial rewards of ICOs are unprecedented orders of magnitude higher than what you could expect to get by investing in the early stages of tech startups.

The reason makes perfect sense… Most startups try to meet a large need. Silicon Valley investors seek 10 times returns from companies that improve the product and/or user experience by 10 times.

It means 10 times faster or cheaper or friendlier user experience, 10 times better quality, 10 times more features, etc. You get the idea. But every now and then, a company comes on the scene and transforms an entire industry. Think Uber or Airbnb.

Early investors in those companies make much more. You can add one or two more zeros to the 10X hoped-for gain.

What About ICOs?

Those exceptions where industries get a complete makeover are destined to be much more common going forward. That’s due to ICOs, which don’t just meet needs… They reinvent entire industries.

Forget 10X improvements. The impact that the ICOs’ underlying technology (called blockchain) is expected to make is much more sweeping.

An early example? Sending bitcoin from one country to another in seconds without bank participation. Many, many more examples are coming.

At the moment, this technology is new and, for the most part, still in its testing phase. But right now we’re at the beginning of a two- to three-decade-long technological transformation that will reinvent dozens of industries.

Ready or Not, Dozens of Industries Are About to Be Disrupted

Our banking system is the most obvious sector that will be disrupted, so it’s getting most of the attention right now. But that’s just scratching the surface.

As I write this, tokens are funding the rollout of hundreds of decentralized (and disruptive) technologies.

Some examples include cloud storage (Filecoin, Storj); digital advertising (Basic Attention Token, adToken); marijuana (PotCoin); and dentistry (Dentacoin).

Token-based projects are gearing up to anchor revolutions in transportation, healthcare, shipping, insurance, real estate and dozens of other industries. It’s becoming clearer by the day that cutting out the middleman is a game changer.

The efficiency gains – simply from sharing and securing information on a decentralized web-based ledger – are proving to be major.

I recently wrote that “the ICO companies of today are setting themselves up to dominate vast swaths of tomorrow’s industries.”

Sounds like a good investment opportunity, no? Except that right now we don’t know who will rule banking, cross-border and peer-to-peer payments, insurance, transportation, real estate, and many other vast global markets.

Then what do we know? We know that several token-based technologies will emerge as big winners and make their investors a ton of money.

So, rather than try to pick the winners this early in the game, it makes a lot more sense to identify a company that has positioned itself to enable hundreds of token-based companies.

The Humble Company Behind America’s Next 100 Moonshots

In 1969, we went to the moon – an incredible technological achievement.

I remember being glued to the TV that hot July day, along with millions of other Americans, as Neil Armstrong said, “That’s one small step for man, one giant leap for mankind.”

If ICOs are moonshots, then StartEngine is the rocket that will get them there. If just a fraction of these ICOs reach their destination, StartEngine stands to profit enormously.

Again, as early investors, we want to participate in the enormous upside of ICOs. But we don’t want to make 100 bets on 100 ICOs.

That’s why I prefer to invest in the company that fuels those moonshots. Put another way, StartEngine is a classic “pick and shovel” play.

I’ve looked at this ICO sector from a dozen angles… studied its ever-shifting dynamics… thought long and hard about how best to manage the considerable risk that comes with the ICO sector.

My conclusion? StartEngine is the best way to take advantage of the enormous profit opportunities that will arrive with the coming technological revolution that is based on blockchain technology.

Bringing ICOs Out of the Shadows

StartEngine runs a website that helps startups raise capital under the crowdfunding regulations known as Regulation Crowdfunding (Reg. CF) and Regulation A+ (Reg. A+).

It also offers some deals under Regulation D to accredited investors.

StartEngine now has more than 100,000 people using its website, and more than 17% of site users are active investors. So far, it’s helped startups raise more than $40 million.

And it’s been one of the most active startup-enabling portals these past few quarters. According to Crowdfund Capital Advisors, it occupies the No. 2 spot behind Wefunder.

But StartEngine is now making the kind of bold moves that could very well launch it into a preeminent position among startup portals in the not-too-distant future.

It’s the first startup portal in the U.S. to offer SEC-registered ICOs.

StartEngine is already listing a handful of ICO investing opportunities on its site, with dozens more expected before the end of the year.

How the portal does this is brilliant… and brilliantly simple. Companies on its platform can raise up to $1 million in token sales under Reg. CF or up to $50 million in token sales under Reg. A+.

The portal gives each investor a wallet containing the security tokens they bought.

Alternatively, listing companies have the option of issuing a limited number of tokens that can later be exchanged for utility tokens – that is, tokens with actual functions. It’s similar to purchasing a gold futures contract and, after a time, taking delivery of the gold.

The Beginning of Explosive ICO Growth

To be able to give the crowd access to ICO opportunities is incredibly exciting because, even without the crowd, ICO funding has exploded, with $3 billion-plus of funding just this year.

ICOs are now dominating startup funding in the blockchain space and are raising more funds than traditional venture capital. Take a look at this chart…

It’s a stunning development, one that shows no signs of slowing.

This year’s ICOs amount to less than 1.35% of the total cryptocurrency market (which is estimated to be more than $400 billion as I write this).

If the Securities and Exchange Commission does force ICOs to declare their tokens to be securities (as many, including me, fear it will), that would only make launching ICOs under Reg. CF or Reg. A+ a more attractive option.

That’s because funding ICOs under Reg. CF or Reg. A+ shields these companies from other more expensive, complicated and restrictive government regulations.

A New Way to Cash Out Sooner Rather Than Later

I suspect that offering crowdfunded SEC-registered ICOs would have been more than enough for me to recommend StartEngine. But I’ll never know. Because from the very beginning of the vetting process, I was aware of another notable StartEngine innovation… And it’s as transformational as the first one.

StartEngine now has a platform that lists “secondary” startup shares that anybody can buy or sell.

Imagine… you bought shares at the beginning of last year, and now they’re up 250%. Why not take some profits and put them into your bank account?

There was no way to do that before, but now, thanks to StartEngine, there is. Just list your price on the company’s website and wait for buyers to tell you how many shares they want.

It’s pretty straightforward. If your price is reasonable, offers will pour in. If it’s not, they won’t.

And if your shares are floundering? You could choose to sell them sooner (as opposed to later) and get back some cash that you could put toward other crowdfunding opportunities.

Once again, StartEngine has forged a new and exciting path for crowdfunders.

Liquidity was the one big thing that startup investing lacked. I’ve been eagerly waiting for a secondary market just like this one to develop.

The fact that StartEngine made it happen doesn’t surprise me at all.

The company’s management team is determined to build its competitive advantages around leadership, innovation, and a constantly evolving business model that takes advantage of the latest shifts in the ICO legal and market ecosystem.

The 4 M’s

So, in discussing the four critical M’s we evaluate before issuing a recommendation (management, monetization, market and metrics), let’s begin with StartEngine’s outstanding leadership…

Management. Howard Marks and Ron Miller, the two founders of StartEngine, are extremely seasoned businessmen. I traveled to Santa Monica, California, recently to interview them, and I came away very impressed.

Howard is the former founder and CEO of Acclaim Games, a publisher of online games that was sold to The Walt Disney Company.

Before that, he was executive vice president and then chairman of Activision Studios from 1991 to 1997.

It was during this period that Howard learned how to dig companies out of deep holes and reverse their fortunes. He and a partner took control of the ailing Activision in 1991 and made it into one of the largest and most successful game studios in the industry.

He went on to create the first startup accelerator in Los Angeles, investing in more than 60 companies before founding StartEngine in 2014.

In mid-2015, he launched the brand-new Reg. A+ era by hosting Elio Motors’ Reg. A+ raise. Elio makes a quirky three-wheeled gas-sipping car that captured the imagination of thousands of investors. StartEngine helped it raise nearly $17 million from 6,345 investors.

StartEngine went on to help dozens of other companies raise money from thousands of investors – more than 17,000, in fact. And now Howard sees an even bigger opportunity – about which my co-founder Adam and I share his excitement – to extend the opportunity to invest in ICOs to EVERYBODY, not just the wealthy.

Adam and I applauded when the SEC finally issued regulations that allow ordinary investors to invest in early-stage startups. It happened later (much later) than we expected.

But what’s happening now is different. Thanks to Howard and his co-founder, Ron, ICOs will be available to literally millions of people much sooner than we expected. It’s taken me by surprise – in a good way. And I don’t think I’m the only one.

I asked Howard how he came up with this brilliant idea. He said that once he dived into the legal weeds of token-raising events, he realized how much riskier it was than he had assumed. He explained…

When companies sell tokens that later are exchanged for a utility token (once the service becomes available), they’re rolling the dice that the SEC won’t crack down on such activity, designating the token a security and therefore subjecting it to its securities regulations. This is no small matter but, in my estimation, fixable.

What was Howard’s idea? To register ICOs under Reg. CF or Reg. A+. By doing so, the ICOs would become fully compliant with SEC rules.

Now Howard has to execute on his idea. He’s optimistic. “There’s no shortage of ICOs with exciting ideas and technology looking for a way to raise quickly and cheaply and without drawing any unwanted attention from the SEC,” he said.

Howard’s partner Ron is another serial entrepreneur who is deeply immersed in the startup and ICO space. He built and sold five companies before co-founding StartEngine.

Ron and Howard make for an exceptionally strong team. As their ICO platform scales, the challenge will be to make sure the various tools and services offered on the StartEngine site work smoothly; to keep an eye on the SEC’s ever-changing view of ICOs in order to adapt when necessary; and to charge fees that strike the proper balance between giving ICO companies attractively priced services and allowing StartEngine to grow revenues and make a profit. Which brings us to our next criterion…

Monetization. StartEngine charges different fees for various services. For companies targeting up to $1 million under Reg. CF, it charges 6% of capital raised – up to $60,000 per raise.

For companies raising up to $50 million under Reg. A+, StartEngine charges $20,000 per month plus warrants, which are like stock options that can be cashed out later.

Companies raising on StartEngine’s site also have the option of paying $50 per investor. So, for example, if 1,000 people invested on the company’s page during its raise, StartEngine would charge it $50,000.

It’s a pretty unique payment structure that links traction to cost. If a company never achieves much traction and never gets a lot of investors, it also doesn’t pay much.

For companies feeling a bit overwhelmed by the raising process, StartEngine charges $5,000 per campaign for full onboarding, consulting and creative services. And, after the raise is over, if a company wants help in managing its new group of investors, for $3 per shareholder per year it can enroll in StartEngine’s investor management system, called StartEngine Secure.

The overall monetization structure should allow the company to increase revenue commensurate with increasing traffic on the investor side and listing more deals on the fundraising side.

The warrants give StartEngine a nice upside. They are an opportunity to score big with those companies that become large and profitable. To StartEngine’s credit, the company’s portfolio of services covers the entire gamut of user experience, removing potential pain points while diversifying its fee structure. Overall, it’s a sound monetization plan.

Market. There are close to a hundred crowdfunding campaigns happening at any one time these days. There were 98 at the end of May 2017, according to Crowdfund Capital Advisors. How much do these campaigns raise?

More than $400 million in capital investment has been raised by companies under Reg. A+ since that law was enacted in June 2015. Some $52 million has been raised under Reg. CF since it was enabled in May 2016.

These numbers are growing but remain modest compared to venture capital money going into startups – at least for now.

That being the case, where’s the excitement here? It’s the size and growth of the ICO market. As you can see from this chart, ICO funding in the second quarter of 2017 exploded…

But since 2013, venture capital funding has still dominated blockchain fundraising. But that’s a good thing. It means that ICO funding is still small. The ICO phenomenon is in its infant stage and has a long way to go to gain equal footing with venture capital.

Blockchain technology… use cases… cryptocurrency adoption… all of these are still in their infancy. StartEngine is getting into the space early, but not too early. We think its entry is well-timed – the market should experience explosive growth over the next five to 10 years. And that means only one thing…

StartEngine has the chance to grow exponentially right alongside this market.

Metrics. StartEngine has raised more than $40 million for 50-plus companies under Reg. A+ and Reg. CF ($30 million under A+ and more than $10 million under CF).

More than 100,000 people have used its website, and at least 17,000 of them have invested in companies listed there.

And StartEngine is picking up the pace. As you can see from the chart below, it has far outpaced other startup portals in amount of funds raised in both the last quarter of 2016 and the first quarter of 2017, though it still lags behind frontrunner Wefunder.

StartEngine is off to a solid start. Other portals have better numbers here and there. Critically, though, those portals don’t offer ICO funding opportunities or secondary market trading.

If it can execute, StartEngine will be on a faster growth track than other crowdfunding portals. We’re looking forward here, not backward… and the future looks very promising.

Early Is How You Earn Big Returns

I’ve already said that StartEngine is early but not too early. The same goes for investors. Early is when the big money is made. But as investors, are we too early? Absolutely not.

Because if you just look around, there’s plenty of evidence that ICOs and blockchain technology are not just a passing fad. Companies are certainly taking this space seriously…

• American Express is introducing blockchain- enabled cross-border B2B payments to customers.
• Hewlett-Packard is planning to use distributed ledger startup R3’s Corda platform to offer services for payments and identity.
• NoterEth is a notary service that uses blockchain technology to verify a person’s identity and eliminate the need to show an ID with a stamped document.
• UJO’s blockchain technology lets it give greater rights to artists rather than big record labels.
• IBM has teamed up with blockchain startup Stellar and payment company KickEx to launch a cross-border payment system for banks to reduce costs and settlement time.
• JPMorgan is getting ready to unveil Quorum, a blockchain technology that will allow interaction between public and private blockchains while supporting data privacy.
• Microsoft and Bank of America are collaborating on a blockchain to digitize and automate the money flow around trades.
• Maersk, the Danish shipping giant, is testing a blockchain to track its shipments and coordinate with customs officials.
• Airbus, the French airplane manufacturer, and Daimler, the German automaker, want to use blockchains to monitor the thousands of parts that come together to make their jet planes and cars.
• BAE Systems, the British defense contractor, is exploring the use of blockchain to share cybersecurity threat data.

Blockchain will be a critical part of many future technologies, and the foundations are being laid right now. We can see it happening before our eyes. So it may be very early in the life of these transformational technologies, but the ICO/blockchain space is very real.

And at the moment, it’s not necessary to pick the ICO/blockchain technology winners. By backing a smart, innovative enabler of ICOs and the blockchain, we’re making as safe an investment play in ICOs as can be made.

The upside potential is still huge… and the risk isn’t. If there’s just one ICO play you make, this should be the one.

How to Invest

Not surprisingly, this deal is hosted on StartEngine’s own website, www.startengine.com. Adam and I have seen how well the portal has taken care of our members. No worries there.

If you haven’t registered with the StartEngine site yet, go to the home page and click “sign in” on the upper right corner of the page. All you have to do is provide your name and email address and create a password to register. Once you’ve registered…

• Go to StartEngine’s raising page at www.startengine.com/startenginecrowdfunding.
• Then simply click the green “Invest Now” button and follow the site’s instructions. By the way, you can invest using a credit card if you wish.

If you run into problems at any point, please call our friends at StartEngine directly at 1.800.317.2200.

Editor’s Note: If you’re new to First Stage Investor or if you just need a refresher on how to invest in startups through portals like StartEngine, check out our video tutorial “Investing in Startups Through Online Portals” at https://earlyinvesting.com/reports/investing-startups-online-portals/.

Risks

StartEngine is an early-stage tech investment, and like all such investments, it’s risky. Do not invest money you can’t afford to lose.

Also, remember that these types of investments are not liquid, meaning you can’t buy or sell your stake easily. If and when an exit opportunity arises, you’ll be informed immediately.

Deal Summary

Minimum investment: $500

Investment type: Common shares

Valuation cap: $65 million

Maximum target amount: $5 million

Investment portal: StartEngine ■

2018 outlook

Our Bullish Bitcoin Outlook for 2018

A Triple Stampede From Retail Investors, Institutional Money and ETFs

By Adam Sharp, Co-Founder, First Stage Investor

2017 has been a big year for cryptocurrency.

Bitcoin started the year trading around $1,000.

As of December 7, it was trading for more than $15,200!

First Stage Investor members who bought bitcoin on our initial bitcoin recommendation are now up more than 300%.

We’re also up nicely on Litecoin, Bitcoin Cash and Ethereum.

New Economy Movement (XEM) is lagging our other positions, and we may move into another position soon. (I’m considering replacing it with Dash, but I’m still researching.)

It’s been an impressive run so far, but this cryptocurrency bull market is not even close to over.

I have not sold any of my holdings.

And I recommend you also hold strong for the long term.

Forecast

Our strategy remains the same: Buy and hold, and add to your position on dips if possible.

I believe bitcoin could hit $35,000 or higher next year. It certainly wouldn’t be out of the ordinary to see that happen.

From 2012 to 2013, bitcoin rose from $5 to $1,000. That’s 200X. In this current bull market, we’re up more than 2,900%, from $500 to $15,200-plus (as I write this).

There are four major catalysts that should drive cryptocurrency gains through 2018 and beyond:

• A new flow of institutional money
• A flood of retail investors
• Possible bitcoin exchange-traded funds (ETFs)
• Faster and cheaper transactions.

Let’s go over each of these catalysts in more detail.

(Big) Institutional Money Rolls In

There are now more than 120 hedge funds dedicated to investing in cryptocurrency.

Of those, 90-plus launched in 2017. The funds we know of so far total $2.3 billion.

And billionaire Mike Novogratz just raised the biggest fund yet at $500 million (which includes a big chunk of his own money).

This is a large amount of capital that was raised very quickly. It indicates very strong interest from wealthy and professional investors.

And with recent bullish price action, I can almost guarantee there are hundreds more hedge funds on the way.

It’s not often you raise hedge fund capital this easily.

As proof, Coinbase (the largest U.S. cryptocurrency exchange) just launched a new custodian service for hedge funds and other institutional investors.

Coinbase says it believes there’s $10 billion on the sidelines waiting for a trustworthy commercial storage and purchase option.

According to Bloomberg, Coinbase CEO Brian Armstrong said…

By some estimates there is $10 billion of institutional money waiting on the sidelines to invest in digital currency today. When we speak with these institutions, they tell us that the number one thing preventing them from getting started is the existence of a digital asset custodian that they can trust to store client funds securely.

Cryptocurrencies are on the rise. And I believe a large percentage of the world’s traders are destined to get involved.

Today, the vast majority of professional investors own zero cryptocurrencies.

It is just coming on their radar now. And it typically takes people a while to get comfortable enough to invest. Large bureaucratic financial institutions take even longer.

In other words, I think you still have time to buy cryptocurrencies.

But the window is somewhat narrow. I’d say by February 2018 the race will be on.

Tens of thousands of financial institutions will be rushing to get an allocation in bitcoin. Their investors will ask, “Why don’t we own any bitcoin?”

There are only 21 million bitcoins that can be mined. With approximately 33 million millionaires worldwide, that’s not even enough for a whole coin each.

Hedge funds are leading the way. Wealth managers will follow. I suspect wealthy tech billionaires are already helping to push prices up.

The money herd is coming. But you should also be prepared for times of high volatility. Hedge funds and algorithmic traders may accelerate market moves up and down. Sharp corrections are common in all cryptocurrencies.

Short-term drops of 20% to 35% happen occasionally. Just be aware of it, and don’t let it scare you out of the market.

Retail Investor Stampede

Coinbase is one of the few cryptocurrency exchanges that publicly posts its user numbers and updates them in real time. You can find this number at Coinbase.com/about.

As of November 20, 2017, Coinbase is on track to add approximately 1.2 million users per month. This is nothing short of incredible.

The exchange currently has 13 million accounts total, and the number is still growing. A recent survey of 564 bitcoin owners showed an average investment size of $3,000.

That could be $3.6 billion in new money flowing in every month, just from Coinbase.

The buying pressure from this one exchange alone is incredible.

And there are several more exchanges around the world as big as Coinbase, and probably a hundred small and midsized exchanges.

Plus, people who buy bitcoin tend to hold it. The same survey I mentioned earlier showed that 67% of holders had not sold any. And 20% plan to hold for at least seven years.

I strongly recommend being a longtime holder, of course. Don’t cash out too early on this one. If you do, keep at least some of your bitcoin for the future.

Bitcoin ETFs in 2018?

The U.S. Securities and Exchange Commission has denied all proposed bitcoin ETFs so far. One of the primary reasons the SEC cited is that bitcoin lacks a futures market.

On December 11, 2017, the CME Group’s bitcoin futures market goes live.

When it does, one of the SEC’s primary objections will disappear, which will (hopefully) clear the way for bitcoin ETFs.

In fact, Bloomberg just ran an article headlined “Bitcoin ETFs Are the Next Step After Futures.”

I believe the launch of ETFs would be gigantic for bitcoin. Imagine if every investor could simply buy bitcoin like a stock in their retirement account. The increase in demand would be tremendous.

One of the top complaints people have about buying bitcoin is that they can’t do it in their “regular accounts.”

With the retail and institutional stampedes already underway, we don’t need ETFs to drive bitcoin higher.

But if we get them? Pouring gasoline on lava is a workable metaphor, though even that may not do it justice.

I believe an ETF backed by real bitcoins could easily reach a $50 billion market cap (bigger in time), locking up a big chunk of liquidity from the bitcoin markets and driving prices far higher.

Faster, Cheaper Transactions

Bitcoin is often criticized for having high transaction fees and slow performance.

That’s starting to change with the use of new SegWit software (a recent scaling upgrade the industry is still adopting).

But soon we should have two major upgrades to the bitcoin network.

The first is the Lightning Network. This is a scaling solution that should enable extremely fast and cheap bitcoin transactions.

This network will allow parties to transact in bitcoin off the blockchain, which is typically the bottleneck that slows things down.

The Lightning Network’s developers claim that their solution will enable bitcoin to scale tomillions of transactions per second (from the current seven transactions per second).

The Lightning Network will also enable so-called “atomic swaps.” This will allow users to swap cryptocurrencies directly from their wallets.

So bitcoin will be easily exchangeable with Litecoin and other digital currencies, all from within a user’s wallet.

The second big upgrade that’s coming is Schnorr signatures. These will change the way that bitcoin signatures are written, making them far more efficient.

Schnorr will open the door for a dramatically faster bitcoin network. It will also improve current security methods.

Since bitcoin is open-source and free to use, other cryptocurrencies also stand to benefit from these technical upgrades.

What to Look Forward to in 2018

With major technical upgrades arriving, on top of all the buying pressure we expect in 2018, the cryptocurrency world should have a very bright year in 2018 and beyond.

While bitcoin is likely to grab all the attention in the first half of the year, alternative cryptocurrencies should rise as well.

The flood of new bitcoin owners will eventually get curious about altcoins and shift some of their profits into smaller coins.

It’s a win-win for cryptocurrency owners. Buckle up and get ready for another exciting year. ■