Here comes the ICO, a wild new way for cryptocurrency start-ups to raise money

• ICOs have raised $180 million this year, compared to $101 million in all of 2016, according to Smith + Crown.
• Start-ups with little to no revenue are raising money by selling custom tokens.
• There's currently no legal or regulatory framework for this emerging type of offering.

Talk to a cryptocurrency enthusiast and there's a good chance you'll hear some version of this: It feels a lot like 1999.

That's not to suggest that bitcoin and its ilk are the next Webvan or Pets.com, but looking more broadly at the current trend, the analogy makes sense.

While bitcoin crossed $2,000 over the weekend and is up by almost 150 percent this year, other digital currencies have rallied even more. Ether has tripled in value in the past month and Ripple's XRP is up about tenfold.

In 1999 we saw the speculative internet IPO. Today, it's the ICO -- initial coin offering.

Companies built on blockchain, a digital database for recording financial transactions and other types of deals, are raising money by selling digital "tokens" that can typically be used to pay for goods and services on their platform, or just stashed away as an investment.

Thus far in 2017, companies have raised $180 million in ICOs, compared to $101 million all of last year, according to Smith + Crown, a blockchain research, data and consulting group. Often, these are very early projects that are far from generating significant revenue.

Sound familiar?

"We're in a very frothy phase of ICOs," said Naval Ravikant, a Silicon Valley investor and entrepreneur who's also a venture partner at digital currency firm MetaStable Capital. "People are getting caught up in the vision and it's going to take 10 to 20 years to build out. In the meantime, people are throwing money at anything that looks like it has a shot."

Interest in cryptocurrencies is reaching the masses. This week, New York is hosting two industry conferences -- Consensus and Token Summit. On Monday, 86 firms from Toyota to Merck joined a group called the Enterprise Etherium Alliance (EEA) to create standards for smart contracts.

Meanwhile, 10 financial institutions signed up with cryptocurrency platform Ripple last month to send real-time international payments, joining a roster of clients that already included Bank of America and RBC.

The ultimate vision is a world in which all data and transactions are trackable via an electronic ledger that eliminates delays caused by disparate currencies and financial systems. Blockchain currently claims to process 160,000 transactions a day across 140 countries.

'Trouble with the SEC'

Start-ups building applications on blockchain are launching ICOs to raise capital without giving up big equity stakes in their companies and to drive interest and usage of their product.

Currently, the market is almost entirely unregulated. In its purest form, an ICO looks like a Kickstarter crowdfunding campaign, which is a legal way for a company to raise money by having users fund an early-stage project in return for perks and early access. Crowdfunding can be risky, because if the company cannot deliver the product as promised, backers have no recourse.

But unlike a campaign to fund a Pebble smartwatch or the development of a mobile game, ICOs are inherently financial in nature and can look more like securities, particularly when the tokens fluctuate in value. As ICOs gain popularity and dip more into the mainstream, look out for the regulators.

"If anyone is selling these securities to U.S. citizens, you will get in trouble with the SEC for sure," said Pamela Morgan, an attorney and the CEO of consultancy Third Key Solutions, at a bitcoin meetup in Switzerland last month.

Civic, the developer of a digital identity platform for online transactions, is aiming to raise $33 million in an ICO beginning Thursday, to build out its network.

Vinny Lingham, Civic's co-founder and CEO, said the company is playing it straight and hired law firm Perkins Coie to try and stay out of the legal gray area.

"These tokens are tokens you need to use to function within our platform," said Lingham, who started the company last year. Unlike the case with an IPO, Civic is booking the proceeds from the ICO (or token sale) as revenue, since it's selling a product that customers can eventually use.

Investors in the ICO will pay with bitcoins or ether -- two popular types of cryptocurrency -- in exchange for Civic's tokens. Banks, travel companies and hotels can use the tokens as currency when clearing transactions, and customers can acquire more tokens by inviting friends.

Stan Miroshnik started the Argon Group in 2016 as an investment bank focused on digital currencies. He's advising on the Civic offering and has plenty more in the pipeline, with an ICO scheduled about every three weeks.

But Miroshnik said there's clearly excess in the market now, with companies that have no functional business and no real relation to blockchain looking to ICOs for a quick buck.

"We are very cautious," said Miroshnik. "This is something that should be coming from the community and projects related to blockchain."

Prior to Civic, Miroshnik's biggest deal was last week, when Storj Labs initiated a $30 million token sale. Storj is a cloud storage company that uses the available capacity on lots of individual computers to store and secure data. Imagine Amazon Web Services, but instead of owning massive data centers full of servers, Storj pays individuals to let others rent space on their machines.

If the SEC doesn't crack down, this party will be amazing, the biggest party in town for a long time. If they do crack down, a lot of people are going to feel a lot of pain.

Naval Ravikant

Cryptocurrency investor

For Storj, the offering lets the company capitalize on the surging value of digital currencies. The company created the Storjcoin three years ago and sold a portion of them in a $500,000 crowd sale. The value of the currency has jumped 50-fold since then, leaving Storj with hundreds of millions of dollars worth of coins.

Storj is selling 15 to 25 percent of outstanding Storjcoins, which are based on the Ethereum platform after migrating from bitcoin.

"It's an asset on our balance sheet that has value and we're converting it into fiat," said John Quinn, co-founder of Storj. "Part of the rationale was to raise capital to accelerate development of the business."

A member of bitcoin trading club poses with bitcoin medals at the club's meeting in Tokyo.

Yoshikazu Tsuno | AFP | Getty Images

As of late Wednesday, the ICO had raised almost $29 million of the $30 million target. Buyers in the offering can use the currency to pay for storage and bandwidth.

Storj competitor Filecoin is likely to hold an ICO in mid-June. But the prospective investor base is very different.

Filecoin will be the first offering on a new platform called Coinlist that is targeting accredited investors, or people with a net worth of at least $1 million (excluding the value of their homes)

Ravikant, who's an investor in both Filecoin and Coinlist, said he doesn't know when the regulators will come knocking, but he's certain that these companies will eventually have to exist within the confines of securities law.

"We're going to try and prove to the market that you and do a legal coin offering," Ravikant said. "If the SEC doesn't crack down, this party will be amazing, the biggest party in town for a long time. If they do crack down, a lot of people are going to feel a lot of pain."