November 18th, 2018 by Michael Barnard
Along with our regular daily clean tech news coverage, CleanTechnica also produces in-depth reports on various aspects of clean energy and clean transport. One of the emerging technologies we cover that isn’t directly a clean tech innovation is blockchain, which promises to be a catalyst for innovation in the green economy in the very near future. Blockchain is probably most widely known to the public as “having something to do with cryptocurrency and Bitcoin, right?,” which is partially correct, but the technology itself has a wide range of applications, some of which will be crucial in the fields of distributed renewable energy, grid management and energy storage, and smart contracts, among others.
The full report Blockchain – An Innovation Enabler for Clean Technology, which was published in July, is a deep dive into blockchain and its potential, and we will be posting more excerpts from the report over the coming weeks. (Read the last installment here.)
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 were the IPOs of 2017, and like the dot-com IPOs of 2000, they were 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 it will get less than that, but it has sold over 25 million of its SunCoins to over 1,600 contributors so far, over 25% of its hardcap.
That’s more than $60 million already flowing to cleantech offerings with more coming.
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 crowdfunding, 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 considered 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.
According to people who pay attention, Singapore and Switzerland are both good places to base ICOs, with these tiny countries being in the top 4 countries seeing ICOs along with the USA and Canada. This makes sense given their focus on being international banking hubs providing security and privacy to people who use their services.
Having spent two years in Singapore, I can say that it has a strong focus on maximizing entrepreneurialism and innovation. It does have a tax treaty with the USA, but is, like Ireland, an international location with very low corporate taxes. That’s important given the potential to be taxed based on your ICO proceeds. But even Singapore has challenges. At least ten ICO-based companies saw banks close their bank accounts. Here’s a breakdown of the current state of regulation in countries around the world regarding ICOs to help start the thinking.
The US IRS takes its cut regardless of where the money is made, and that is applied to businesses as well. There are a thicket of tax regulations about US individuals and corporations with foreign interests, regardless of where the business exists.
Canada has established a regulatory sandbox via the Canadian Revenue Agency (CRA) to support fintech innovation, and it’s being used by ICO-bound entrepreneurs. However, all is not a bed of roses there either. One of the first Canadian ICOs to apply was given a set of conditions which would allow it to be given discretionary relief from being considered a “distribution” requiring reliance on an exemption or filing an exemption.
If you are considering taking the ICO plunge, this appears to be a solid set of questions to ask about a country’s regulations and statutes.
ICOs aren’t the only game in town for cleantech entrepreneurs and investors. Other models deserve attention.
The first is the previously mentioned WePower, which is building a blockchain platform to allow renewable projects to get funding. It started in Europe but has recently expanded to Australia. Its premise is that you can raise capital using its platform by pre-selling commitments to produce electricity. Currently, its model is commitments of 1 KWH and is represented by the WPR token. This allows a common hub similar similar to Kickstarter or GoFundMe but with a clear revenue model and focus on renewable projects. It’s easier to find investors if the investors are on a single platform. WePower’s first client was a 1 GW Spanish solar farm, secured in July of 2017. Note that it is explicit about not permitting US residents to participate at this time due to regulatory uncertainty.
The second is The Sun Exchange. Rather than being an ICO or capital raising model, it allows investors to buy solar panels with bitcoin or fiat currencies and lease them to schools and businesses in sunny Africa. This gets around most of the regulatory burdens and permits small investors to contribute to decarbonization, engage with cryptocurrencies, and enjoy some revenue from it.
In 2018, ICOs are starting to lose favor. Blockchain and cryptocurrencies are shifting from the Innovators category to the Early Adopters.
Regulations are becoming clarified. Institutional vendors are starting to enter the market. Pension funds such as OMERS in Canada are co-creating Ethereum investment funds.
Cryptocurrency startups such as Chia are explicitly avoiding an ICO in favor of early venture capitalist funding followed by a standard IPO.
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.
Stay tuned for more excerpts from Blockchain – An Innovation Enabler for Clean Technology, or view the summary and request the full report at https://products.cleantechnica.com/reports/