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Why Ethereum Startups Don’t Need San Francisco or Silicon Valley

This guest article was written by Jack du Rose, co-founder of Colony.

This year a new funding model took hold in the startup community: the token sale. Token sales on Ethereum have raised hundreds of millions of dollars for startups, in some cases, in mere seconds. The funding comes not from Silicon Valley VCs, but from crowds of people around the world with interest and a little bit of technical know-how.

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Token sales are sometimes referred to as ‘Initial Coin Offerings’ (ICOs), likening them to a stock market IPO. They have also been called Ethereum’s ‘killer app’, implying that startup fundraising is Ethereum’s ultimate use-case. Neither of these characterizations are true of a well-formed token sale. To get why, it’s important to understand this new paradigm.

Jack du Rose

Rather than being equity in a company, tokens are a necessary component of some kinds of software that developers build on Ethereum. Metaphorically speaking, a token sale would be something like a board game company raising funds by selling trading cards in advance, then using the proceeds to develop the game board, box, and rules.

Sometimes the tokens are a sort of internal currency that must be used to pay for services on the platform. In other cases, the token may enable holders to interact with and influence parameters of the platform or service. The property of being integrated within the dApp or platform is essential for a healthy and well-formed token sale, and the key element that can distinguish a token sale from something like a stock or a securities offering.

Latest developments

The SEC has recently weighed in on this very issue by publishing an investigative report on the infamous token sale of ‘the DAO’ — declaring that DAO tokens were, in fact, securities, but that no prosecution would be sought. The report has generated fervent discussion in the blockchain c...

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