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Can Initial Coin Offerings Help Build the Real Estate Sector?

Initial Coin Offerings have come out of nowhere to be all the rage for Silicon Valley and Wall Street. According to an article recently published in Forbes “Initial Coin Offerings (‘ICOs’) have quickly grown to account for more startup funding in blockchain-based companies than all of Venture Capital. Nearly $2.3 billion has been raised to date in ICOs, with the large majority of that taking place in the first half of 2017.”

How do ICOs Work?

Coin offerings are a way for start-ups or online projects to raise funds without going the traditional sources of venture capitalists or seeking angel investors. It is a new type of crowd-funding. Unlike Kickstarter – that offers backers a chance to share a piece of the project (limited editions or copies of the creative work being produced); or Crowdfunder – which offers access to top equity crowdfunding deals – what is being offered in an ICO are digital “tokens.”

This process of selling new cryptocurrency tokens in an ICO results in funding coming from established cryptocurrencies, most commonly Bitcoin or Ethereum.

As Forbes reported “Most ICOs being done today aren’t intended to be securities offerings, as they don’t offer equity or ownership in the underlying company the way traditional angel or venture investments do. Rather, a large majority of ICOs are intended as “utility tokens” which allow buyers of the token to access and pay for usage of a blockchain-based software service.

One example of a utility token in use today is the Ether token, as it relates to the Ethereum computing platform. Ethereum is the blockchain-based platform where the large majority of the current ICO’s have been developed. When using the Ethereum network, there are costs associated with the processing of blockchain-based transactions. These costs are paid in the form of the tokens used on Ethereum, called Ether. These transaction fees paid in Ether are called “gas” in the Ethereum network.

In this way, the Ether token provides access to, and payment for, the computing and transactional functions of Ethereum. But beyond its transactional usage, Ether is also a cryptocurrency that is bought, sold, and traded on the open markets.”

Filecoin, which raised $257 million in the largest coin offering to date, is being designed to pay for storage on a global cloud storage network that the creators of Filecoin are promising to build. BET, another coin, is being designed to serve as the chips in an online casino its programmers are promising to build.

“Promising to build” is the operative phrase here, because in almost every case the services that will supposedly make these coins valuable has not yet been finished – according to a recent report from the NY Times.

ICOs in the Real Estate Sector

Innovative Real Estate companies are raising money using tokes as well.

An example is REAL (Real Estate Asset Ledger) a “New Ethereum Smart-Contracts governed ecosystem that applies Blockchain technologies to the enormous Real Estate investment industry, giving greater access to global investment in Real Estate, lowering barriers to entry, and increasing market liquidity” according to its listing on coinschedule.com, based in Singapore.

According to the “Details” section of its listing: The Real Estate Asset Ledger Token (“REAL”) will be distributed at a rate of 220 per 1 ETH to participants in the Contribution Period
It will offer an effective method of investing and securing the value of the existing +100 Billion USD equivalent in cryptocurrency into the less volatile and growing Real Estate market by generating rental income and value appreciation.

Like many ICOs, REAL sets out its business plan in a 37-page white paper. The company claims that the use of Blockchain technology in the field of Real Estate Crowdfunding has the potential to completely revolutionize this sector, giving greater access to investment in global real estate, lowering barriers to entry and increasing market liquidity:

The short-term value proposition here according to the white paper is: “In November this year, a full -fledged site will be launched leveraging the Crowdfunding formula, where any user will be able to invest in a fraction of a Real Estate asset with REAL Tokens, gaining profit rights (rental income + value appreciation) awarded by a smart contract and paid with Ether.”

There are several other past and future ICOs currently being marketed in the real estate space  along the following categories:

Time Shares – where a property has a divided form of ownership or use rights. Currently these properties are typically resort condominium units, in which multiple parties hold usage rights. The growing trend of exchanging timeshares via exchange agencies (RCI / Interval International) makes this part of the real estate market especially ripe for an ICO-funded start-up.

Zillow-type on-line real estate marketplaces – where people can buy, sell or rent real estate.

Airbnb- type online vacation and business-travel rentals marketplace and hospitality service.

Traditional Real Estate Investment Trusts (REITs) – companies that own or finance income-producing real estate in a range of property sectors. Presently most REITs are traded on major stock exchanges.

However, the term “Caveat Emptor” (let the buyer beware) comes to mind here as in September the US SEC charged two companies with defrauding investors in a pair of so-called initial coin offerings back by investments in real estate and diamonds. The people charged are accused of selling unregistered securities, and peddling digital tokens that did not exist.

The SEC issued an Investor Bulletin on Initial Coin Offerings back in July of 2017 stating “Developers, businesses, and individuals increasingly are using initial coin offerings, also called ICOs or token sales, to raise capital.  These activities may provide fair and lawful investment opportunities.  However, new technologies and financial products, such as those associated with ICOs, can be used improperly to entice investors with the promise of high returns in a new investment space. The SECs Office of Investor Education and Advocacy is issuing this Investor Bulletin to make investors aware of potential risks of participating in ICOs.

The SEC goes on to offer some key points to consider when determining whether to participate in an ICO. They are well worth reading as sensible safeguards to participation in what promises to be a hugely disruptive (and potentially quite profitable) technological wave of the future.