Preparing for an ICO
Cryptocurrencies and tokens do not face the same heavy regulations as you find with traditional securities, such as stocks and bonds. So, there is somewhat of a legal gray area when it comes to initial coin offerings. Some falsely believe that an ICO is simple to pool off since you will not have to jump through a long list of regulatory hoops. As such, many companies look to ICOs as the answer for generating their initial liquidity and revenue with minimal hassle.
For example, Dragon Coin was able to raise $320 million earlier this year, beating out the top-earning ICO of 2017. Even established companies can take advantage of ICOs with success. Take the example of Telegram, which raised $1.7 billion via two private pre-sales earlier in 2018 to earn the title of biggest ICO ever. However, a successful ICO must follow a three-part structure with the same major components to be successful and take advantages of these lesser regulations. Doing so enhances the chances of success, both during the ICO and in the long term for the token. These three phases include analysis, planning, and action or launch, with each playing a key role. While it is comparatively easier to host an ICO instead of an initial public offering, it still requires plenty of groundwork as you go through the various phases.
The Analysis Phase
The analysis phase of an ICO follows the coin development. During this phase, you summarize and refine that development process. This is when you will work with the team to create your whitepaper, ensuring coherency and clarity. Keep in mind that this whitepaper is frequently your first chance to connect with the public. This means you would be wise to stick to terms that the average person can understand. At the same time, professionals in the cryptocurrency world will explore your whitepaper. Therefore, you will want to mix in technical discussion, perhaps in a separate section of the paper. In fact, some of the most complex tokens have had two separate whitepapers with much success. This would include a “lite paper” for the average person and a more detailed version for those with the technical and crypto knowledge. During the analysis, you will also want to complete a market review. Your goal is to pinpoint where in its proposed ecosystem the coin fits and whether it fulfills a particular niche. Include those answers in your whitepaper since they can generate support.
The planning phase is when you take precautions against hackers, work on designing the token, and develop the communication strategy and token offering. During this phase, you must determine how much funding you wish to raise and your desired results. Overall, one of the major focuses during this phase is your business requirements.
The action phase is the most exciting portion of your ICO and is also known as the launch phase. It will include a private sale, a presale, and, finally, the public offering. Each of those phases has its own key features. As you move through them, you will have smaller investments per person but a larger volume of investors.
Remember that private sales will not begin until you have set out your value proposition, including the product description and technical information as well as the final draft of your tokenomics. The whitepaper does not need to be in its final draft yet, although it may help. For those who need a refresher, tokenomics refers to the process of creating a token that entices investors while providing room for the currency to grow in value in the future. The private sale of the ICO will focus on close allies of your project who are willing to make significant contributions. There will be a relatively low number of investors in this stage, mostly technical investors who are interested in your project’s technology and crypto insiders. However, it will provide a base that lets the project and initial coin offering move forward. In most cases, these initial investors will be professional funds, experienced wealthy cryptocurrency investors, wealthy individuals, or wealthy family offices who want to diversify their portfolio with cryptocurrencies. You may also search for “pools” during the private sales. These are groups of smaller investors who pool their money to make a single, larger investment. This can be an excellent way to get a large investment on the spot following a one-on-one meeting with a pool representative or group of representatives. You will pitch the ICO idea during the meeting and can see immediate rewards. There is no hard and fast rule as to a minimum investment during a private sale, but you will want to consider setting it between 10 and 100 ETH. This will help create hype about the ICO, which is crucial. If you cannot convince enough wealthy investors to participate, you will need to find a larger number of small investors later on. At the same time, providing a minimum contribution for the private sale prevents wasted time talking to small investors since private sales typically involve one-on-one conversations with each investor. During the private sale, keep in mind why investors will want to take part in this particular round of the ICO. You will want to offer a bonus in terms of percentage or a discount for their token purchase as encouragement. Additionally, investors during the private sale get the benefit of being able to directly talk to the founders and/or management team, asking questions in person. This allows them to make an informed decision regarding the ICO. Presales The presale should target a larger number of investors while remaining focused on the tech community. Look for investors within technical areas as a whole and those who have invested in other similar projects. Presales typically include family, investors, and friends with lower amounts to invest. They also include investors who did not find out about the project in time for the private sale. Although each contributor during this phase will provide less funding than in the private sale stage, there will be more of them. As a rule, tokens are typically cheaper during the presale than during the main ICO, and the fundraising target is also lower. However, the discount or bonus will be lower during the presale than the private sale. Some projects will run their pre-ICO to gather funds for expenses accrued along the way to the main ICO. These can be such things as paid promotional ads, meetup costs, and strategic recruitment. To ensure the pre-ICO or presale goes off smoothly, smart projects use separate smart contracts from during the main ICO. This makes it simpler to keep presale and main ICO funds separate, allowing for simpler and proper auditing and account reconciliation. There is one downside of ICO presales – some early investors will dump their tokens once they can be traded on exchanges. This allows them to make a quick profit by purchasing the tokens for a discount during the presale, then selling it at the ICO price on the exchange. The unfortunate result is that the token’s value falls. Unfortunately, this is a problem that most presales face without trying to implement a control that prevents the sale of the coins within a given timeframe.
When the public sales arrive, you are opening the door to any general crypto investors. They may make tiny investments, but the sheer number of investors will lead to a sizable sum. It begins with registration and whitelisting following the Know Your Customer process, which you will have also completed for every contributor during the private sale and presale. When it comes to offering discounts or bonuses during the main ICO, there is no typical structure in place. The only general rule is that those with a strong ICO would probably offer less of a bonus or discount. If your timing is poor or your ICO is weak, investors may be able to demand higher discounts or bonuses.
Putting the Information to Use
As long as you follow the general phases for your initial coin offering, the process will go relatively smoothly. Do not skip any step since this would increase your chances of failure. For example, if you skip analysis and planning, you would not have a whitepaper, which would lead to tough criticism. Also, keep in mind that even coins with excellent technology might not get investors if there is no thought put into the intended market use. When done correctly, there is a great deal of potential for your ICO. For example, DAOStack had its token sale in May of this year. It sold all allocated GEN tokens for the public sale in just 66 seconds, raising $30 million. In terms of structuring the distribution across private sales, presales, and the main ICO, there is no hard and fast rule. Some projects try to get as many investors as they can to participate in the actual ICO instead of pre-sales since they do not want to give away discounts or bonuses to a large number of contributors. At the other extreme, some projects prefer to quickly raise as much as possible, including during the ICO private sale. They see these private sale funds as an incredibly useful tool since they can be put to use immediately. These projects also view the private sale contributors as potential long-term investors with a vested interest in the company.