Will there be adults in the room when tokens disrupt the financial order of venture capitalists and angel investors?

After regulatory action against issuers of initial coin offerings (ICO) seriously dampened investor enthusiasm this year, some blockchain evangelists are gearing up for another offshoot of start-up fundraising, which they believe could even disrupt the traditional venture capital model – security tokens.

Start-ups working on various blockchain projects have in recent years been raising funds through ICOs – mainly bitcoin and ethereum – and in exchange issue investors with utility tokens that give them access to their application or service. But a number of fines imposed by the US Securities and Exchange Commission this year on ICO issuers – including one in which the regulator imposed a lifetime ban on two executives involved in a fraudulent ICO project – has flagged the potential legal pitfalls that could undermine an ICO.

Worse still, a recent study by the consultants EY in October found that 71 per cent of the 141 ICO projects launched in 2017 failed to bring any working products to the market.

But proponents of securities token, such as Ciarán Hynes, managing partner of Boston-based venture capital firm Cosimo Ventures, are gearing up to launch a “tokenised” venture capital fund, initially targeting US$20 million – some of it from Asian investors.

“Blockchain is disrupting and turning venture capital model on its head,” said Hynes. “The liquidity options from a security token venture fund is more attractive than what has been available under the traditional venture capital fund.”

Different from a traditional venture capital fund, Hynes said its security token fund, Cosimo X, will issue security tokens, each representing a US$1 par value in the fund, for investors to subscribe using bitcoin and ether, or US dollars and euros. The Cosimo X fund will be listed on securities token exchanges.

Cosimo Ventures will use the proceeds raised to invest in four to five tech start-ups seeking Pre-series A round financing. Besides blockchain, Cosimo will also invest in those specialising in internet of things, augmented reality and cybersecurity tech.