Following Golix’s successful $21 million capital raise, could emerging Zimbabwean business enterprises feel the need to follow the example of the Harare-based cryptocurrency exchange, to raise money from the blockchain, via an initial coin offering (ICO)?
“Our business model is to charge fees for the services we provide,” says Golix chief executive and co-founder Tawanda Kembo.
“For some services (for example, listing other tokens) we shall charge exclusively in Golix Tokens (GLX),” he said.
He sees the GLX token as key to the success of his business by lowering transaction fees, as Golix tries to solve the problem of costly cash transfers in Africa, as well as that of financial freedom.
The token can also be viewed as an investment asset that can be bought and held for profit, says Kembo.
Golix was looking to raise $32 million when it floated its ICO at the beginning of June, defying an apparent ban on virtual currencies by the Reserve Bank of Zimbabwe.
The exchange didn’t get the amount of money it was looking for, but that the public bought about 65 percent of the GLX tokens on offer has been hailed by analysts as a success, relative to the doom and gloom that looked almost certain after the RBZ ban.
Now that Golix has proved the central bank and its conservatism wrong, questions are being asked whether this could trigger a flow of tech-savvy Zimbabwean firms struggling to raise working capital to do so through token sales.
Abracadabra of money
In an ICO, companies raise money by creating new digital coins and offering them to the public for sale — much akin to creating money from thin air.
The issuing company typically sets the cost of the new currency, which investors hold in their wallets online — or use for transactional cases — hoping they will appreciate in value as the company flourishes.
Worldwide, about $16,9 billion has been raised this way so far this year, according to data from coinschedule.com, covering a variety of industries, from banking to energy and gaming to insurance, even porn.
Issues of fraud, lost or stolen funds come with the territory. Tens of millions of dollars have been scammed through ICOs, which parrot the initial public offering in common stocks.
Weak lending appetite
In Golix’s case, Kembo believes the ICO presented his business a way to raise money from investors quickly, with less hustle, for the right purposes.
The fluidity is, perhaps, what is likely to make token sales attractive to Zimbabwean starts-ups keen on getting around bureaucratic red-tape synonymous with bank credit and IPOs.
For, so far, banks simply have less appetite to lend to the private sector, to established companies, much less small to medium businesses.
Much of the credit by banks has gone to the government, about $2,5 billion locked in Treasury Bills at the end of 2017, up more than 900 percent from three years earlier, and about 43 percent from the year before, central bank figures show.
By comparison, bank lending to the private sector rose just 2,9 percent to $3,8 billion last year.
“Effectively this equates to a crowding out effect of private sector borrowers,” analysts at brokerage firm IH Securities, concluded.
“We are already seeing SMEs sifting out of commercial bank loan books and being forced to borrow in the micro-finance institution space where interest rates will be higher and tenures shorter,” the analysts said.
We will add that this migration may include a consideration of initial coin offerings for those companies with something credible to offer in this space.
Without issues of collateral, high interest rates or the regulatory rigours that come with the initial public offering, the blockchain, could easily see this nascent financial revolution – others contend its a bubble — come full circle in Zimbabwe, against the RBZ’s wishes, helping firms to raise funds.
The blockchain is a public record of all digital transactions made through cryptocurrencies like bitcoin.
So we now know that any ICO should seek to solve a specific problem, like the Golix token tries to address issues of high costs of sending money across borders for the African diaspora, or those at home.
Initial coin offerings can also be a way for the coin creators to get rich quickly, hustle-free, which is what has fuelled the rising incidents of stolen funds.
In the Golix offer, about 40 percent of the 1,274 billion tokens offered are to be shared between the company owners and their staff over a four year period, after the ICO closed on July 25.
That’s a bounty of about $28 million to be shared within the Golix directorship and employee, if the ICO token offer price of $0,05612 is held constant over the four-year distribution period.
Easy come, easy go
But because cryptocurrencies divide opinion, on the one hand unwanted by global financial regulators and on the other glorified by technology enthusiasts, ICOs have often run into trouble, eliciting derision from world governments.
The Reserve Bank of Zimbabwe governor John Mangudya likened Golix’s token sale to a “pyramid scheme”.
That’s because unlike IPOs, which have to register with a regulatory body like the Securities Exchange Commission of Zimbabwe (SecZim), coin offerings do not, meaning they can get away without making disclosures of important information such as financial background.
In Zimbabwe, a company seeking to raise funds through an initial public offering must file registration statements, including a prospectus, financial statements dating back five years.
The disclosures are subject to review for compliance, according to SecZim, and the company is also required to be valued by independent financial advisors to assess the fairness of the share price quoted in the IPO.
The process of an IPO is “governed by strict rules that foster a high level of transparency and disclosure such that investors are not duped by unscrupulous persons who sell securities that are worthless,” SecZim chief executive Tafadzwa Chinamo, said previously.
For the initial coin offering, firms often release a white paper explaining their strategy, that they hope will fly with prospective investors.
The ICO’s fast and easy approach, though coveted by many an emerging company, may ultimately be its downfall.–ebusinessweekly.co.zw