ICO is an analog of the IPO in cryptocurrency economy. The IPO (Initial Public Offering) is initial public offering of the company’s sharers at the stock exchange in traditional economy.
ICO (Initial Coin Offering) is a process of release of own company’s tokens (an analog of shares in the traditional financial market with a number of unique properties) and their offering at cryptocurrency exchange.
Thanks to the innovations provided by blockchain technology, the cost of this process can be much cheaper with use of the cryptocurrency stock exchanges than the traditional IPO at the financial exchanges. At the same time the result in both cases is similar (an opportunity to receive much more investments than the exceeding costs for issue process).
The states do not regulate the course of ICO, so the rights of investors are not protected here. Though a number of countries (Switzerland, China, Singapore) take measures for regulation of this process. The legal position of ICO is not determined; it can be a fund or a project, a person or a community of people, whereas IPO is an officially resisted enterprise.
On the other hand, ICO provides fast fund raising from a large number of investors. In the IPO a small amount of large stock exchange players make the leading role in investments after long negotiations.
Fund raising for the project with the help of crowdfunding also differs from ICO. Classical crowdfunding is not strictly regulated by the legislation, though safety of investments is guaranteed by cash cover by the initiator of fund raising. The reason for raising funds based on classical crowdfunding platforms (Kikstarter, Boomstarter and others) is often further consumption of this project’s product (a new gadget, a movie or a computer game). Investors are interested in gaining profit after the project implementation.
- Shaping the Idea. (pre-announcement)
This is an announcement of future project in cryptocurrency communities, such as Bitcoin Talk, Reddit and others. Founders of the project write executive summary – a small presentation for investors in which they explain an essence and the purposes of the ICO project. After the executive summary the company receives its first feedback which helps to understand if the project can interest investors or not. Often a lot of questions such as project business-model, unaccounted risks and others can appear after such pre-announcement. Having taken all comments into consideration, the business-model receives due adjustments. This process of feedback with further adjustments repeats several cycles, unless the agreement between founders and potential investors is reached. In completion of the first stage the final business model of the project is accepted and the detailed offer is written.
The idea of the project is very important; in the blockchain community people are ready to invest in the idea which seems to be useful. Non-material motivation is an important reason for ICO. And for some groups it’s even more important, than getting money.
ICO by its nature is one of investment attraction forms, and in practice people give money just for the idea, even without expecting their return with any income. By the way, bitcoin at the initial stage was developed by crypto – enthusiasts who saw in it an incarnate symbol of private money, and later (generally – in 2013) investors, traders and others joined their community.
When a company comes to ICO it issues tokens – the crypto version of securities which can be issued on the specialized web platform, for example Waves or Ethereum. Tokens are a basis of crypto investments and they should be relevantly used in the project. People first of all expect development of blockchain technologies from ICO. Call the subject using the pattern “Name of the Project and Main Idea”, make a prefix [pre-ANN]. For example: [pre-ANN] of VC — Crypto Fund for Media Startups. If so far you don’t know English, then create a subject in a Russian-speaking branch. When you start the main marketing campaign, you will change the subject to prefix for [ANN] or [ICO].
- Choosing a Team
For effective start of your project you will need a team of 20-30 people. They are: content specialists, editors, editors, PR-specialists, SMM specialists, community managers, designers, programmers, targetologs. At the same time these people should have a good command of different languages otherwise the number of employees will increase in proportion to quantity of required languages.
The company can use the following methods for payment to the team:
- Your own or borrowed funds. You can calculate: preparation for ICO — from two to five months, the stage of ICO — from two to eight weeks. Then comes closed pre-sale. You will need MVP, a website (or a presentation) and developed communicative skills of founders. You can collect an amount necessary to you in cryptocurrency ($50-200 thousands), cash it and use for covering of expenses. For investors it is the riskiest stage so you should work hard to make them believe you.
- Small salary for employees, non-material motivation (new market, new knowledge, an international project and so on), but with a big bonus following the results of ICO (from three to ten salaries).
- The main language for ICO is English. Main markets are USA, Asia. You can hardly manage to bring together in one place twenty people hardly therefore get used to working with remote employees. Trello, Slack, Google Drive, Google Hangouts and other similar services will be very useful to you.
- Market Studying
Study projects which have recently successfully carried out ICO. All projects compete for investment’s funds so your rivals are any ICO projects. All of them are different and you can learn something useful from each of them.
One of the most profitable things became issuing of Stratis’s tokens. One part of Stratis’s project is its development platform. Today it is quite difficult to make applications based on blockchain technology. The team created applications using blockchain technologies which are easy to deal with. Many enterprises will value this aspect. What makes Stratis so different from other blockchain platforms is the way it works using its own C # and .NET-applications. Instead of inventing new coding language, Stratis wants to make an easier transition for software developers. So, actually this service simplifiers blockchain technology and makes it available to programmers of different levels. If at the beginning of sales the cost of a token makes $0,007 for piece, then in dive – it already reached $10,58. Thus, its profit in percent (on condition of purchase at the initial price and sale on maximum) could make 151 082%. And it is not an exception. Here some more example : SpectroCoin (they develop several services for a blockchain enthusiasts: one of the most popular is the Visa card with balance in bitcoins). Initial placement here is $0,001, and maximum price is $0,15, that is 18 707%. Or let’s take Storj – a service which sales disk space for cryptocurrency. Initial price of a token was $0,01, and it grew up to $1,2, so profitability (hypothetically) made nearly 12 000%.
Speaking of recent high-quality ICO we recommend paying attention to Civic, EOS, Polybius. Download and study whitepapers from their sites, read their FAQ and sign up for their social channels, join their public chats. You will have to plunge into this sphere and think on the crypto language.
- Company Registration
Register your company in a blockchain – friendly state. Crypto projects usually choose: USA, Belize, Estonia, Cyprus, Great Britain, Singapore, Switzerland.
- Offer Preparation
Whitepaper is the main and the most difficult document: it takes the longest time to be written and it’s better to use experts to check it. If it is possible to add pictures in the whitepaper – do it. Investors will quickly look through the text and focus their attention on pictures. Whitepaper describes all the peculiarities of the project, desirable amount of funds, terms and expiry dates. Whitepaper states the financial tool which will be on sale at the exchange. As a rule, tokens act as this tool.
Token in blockchain is a cryptocurrency which acts as an equivalent of the financial tool represented at the crypto exchange. 1 token can be equal, for example, to 1 dollar of debt obligations, one share of the company, 10 shares of the company, a voting power somewhere and so on. At the moment there are no strict standards what a token should be, it is specified individually in each project. Since the financial tool is chosen, all the rights of the token are described. For example ETH token issued during ICO of Ethereum was made mostly for speculative purpose. As for DGD token, it is supported with gold exchange reserves and also grants the owners the right to make proposals about running the company to other shareholders.
Token can have one or several functions:
- share in a specific startup.
- accounting tool (quantity of API calls, upload amount on torrents).
- digital assert (digital property right to the land, tomatoes in stock and so on)
- the way of miners’ reward (bitcoin is a striking example).
- The way of attacks prevention (commissions in bitcoin nets)
- Currency, a means of payment between participants.
- Payment for the use of system
Typical structure of the document
Background —how everything began
Introduction — description of the market, applicability of blockchain on it.
Market Analysis — deep market research, market growth potential, existing competitors.
Introduction to product — what product, service or project you offer.
Product specific section — more detailed description of a product, a graphics, the table, calculations.
Technical — more detailed description of technical aspects of a product.
Use cases – practice of application of a product.
The pre-ICO — if you are going to carry out preliminary investment
The ICO — see a step “Describe conditions for investors”.
Roadmap of development — what is currently done and what are the terms of project
Financial Projections — how you plan to spend investments
Team — management, key employees and their experience.
Conclusion — results, conclusions.
FAQ — collect all possible questions and publish them. Should new questions appear you can also include them in FAQ. Surprisingly, there are just a few projects which have a full section “Questions and Answers”.
A good practice is make step-by-step tutorials for actions which cause difficulties – using personal account, making transfers from different types of purses, getting tokens after release and other things. It is also an additional content for your social communities and care for your users.
- Launching the Site And E-mail Subscription
Nowadays one-page structure is generally used. It is very convenient for acquaintance. If you plan a large-scale advertising campaign, think of a hosting beforehand.
When sale starts, thousands of users will attend your site at the same time. DDoS-attacks are also possible, so think over protection against them in advance. (Usually at the time of such attacks there is also massive spam with fishing links such as “website temporarily does not work register using this copy link”.
- Subscription form.
- Road map: what is going to be made and approximate terms (in months)
- Team: high-quality photos, short biographies, links to social networks.
- Press: photos with Vitaly Buterin, links to publications, videos of the presentations and performances.
- Product description.
- Working cases.
- Documents: Terms, Whitepaper.
- Contacts and social channels.
What you can send to your subscribers:
- Daily news – to be aware about the project
- Remind about dates of investment remind – in a month, week, a day before the start
- Remind about the start of investment – in 5 minutes before the starts
- Notifications about safety and links to step-by-step manuals
- Terms and Conditions for Investors
At this stage it is necessary to decide if you will have pre-sale and pre-ICO. It is recommended to do both; it gives you an opportunity find bugs with the help of users and to arrange work in social channels. Even if you make pre-sale and pre-ICO you can issue tokens only at the end of the main round of investments.
You should also decide if you use Escrow based on multi-sig purses and independent escrow agents. It means that a company does not raise funds directly but involves third party.
Funds are raised at Multi-sig purse, which is available to deposit agents only that enable additional protection. Thus, the company cannot spend the funds independently without digital signature of the agent.
The deposit agents check if the company carries out its obligations and terms stated in the offer. Should all requirements before investors be fulfilled, the startup can use money on the multi-sig purse. Money is given step by step for each period of the project’s fulfillment. If anything goes wrong, the funds will be frozen unless the company makes its obligations or even returned back to the investors.
In practice it happens this way. A company raises 1$ mln. The plan of project fulfillment is divided into 10 stages. The first 100$ the company gets from multi-sig soon after the funds are raised. Then the deposit agent observes how honestly the company-issuer fulfils its claimed conditions and meets deadline. Should the first stage of the project be successful, the company gets another amount. If the company does not fulfill its obligations, the money will stay frozen at the multi-sig purse or return to the investors.
Check the following:
- Start and end date of ICO (recommended duration is no more than four weeks).
- What currency types can be used (bitcoins, ether and other)?
- Do they have already working product?
- Is there a roadmap?
- What will tokens be based on?
- Tokens: the quantity of issued and mined tokens? Is there any restriction to issue? How the starting price of tokens is provided? What will be with unsold tokens?
- Is there Escrow (deposit agents who have access to raised funds)?
- Audit of the source code by independent auditors, availability of source codes on GitHub.
- Distribution of tokens: to team, on ICO, on bounty-activity. Will distribution be automatic or manual?
- Pre-ICO: what will be received by the first investors and on what conditions (how many i tokens are already issued, how many of them are sold and how many will be issued).
- Who are mentors, advisers, experts?
- What partners does the company have among blockchain services and financial institutions (for example, PWC, banks, investors)?
- Bounty-program conditions.
- Preliminary arrangements on listing at the exchanges and listing terms.
- Bonuses depending on investment time and bonuses depending on percent from general release.
- Is there any maximum hidden cap which stops raising funds?
- For citizens of the USA and other countries: do they accept investments from them?
- Is it possible to give equally the raised funds to the team within two-three years?
- What are motivations for investment: participation in profit, sale at the exchange, participation in management, stock buyback? It is long-term or short-term investment?
- What amounts of funds are important for the company to be considered successful? Is it possible to return funds if the objectives aren’t achieved?
- After the stage of ICO: what the raised funds will be spent on? Are different models of development depending on the amount of the raised funds provided?
- Social channels creation
For western users:
- Site blog
- E-mail support.
- If you have open code, make a link to GitHub.
- If team can do it, make your own channel on YouTube and Instagram.
- If you write in Chinese, use Weibo.
For Russian speaking users use:
Rename your topic at the forum BitcoinTalk, use a prefix [ANN] or [ICO]. If you can, create the same topics in the local branches (there are currently 19 local languages branches at the forum). Make links from each channel to all the others.
You will have to communicate at some channels and the others will be just for informing. Observe balance: give users an opportunity to ask questions and make official channels for announcements and news.
Users can be different. There are also swindlers who can publish fishing links. So, moderate all your channels daily, better all day round. It is especially recommended at the time of ICO- a link, published by a user with MainModerator nick can considerably ruin your reputation if it seen all night at your channels.
It is ideal to provide communication in all your channels and in all languages. If you are not able to support so many resources, then limit them to 2-3 channels. Social media will be useful to you after ICO too. It seems interesting but one of the funds which invest in cryptocurrencies considers a fact that the team doesn’t publish news for 2 months a signal for sale.
In addition to legal and tax troubles the most terrible thing that can happen to your ICO is the scam accuses (scam means on slang any negative effect). Reputation is a very important thing for a project. You should always ask yourself if you can be accused of scam by what you write or do.
- Design and Publication of Bounty Compaign
Bounty in the world of cryptocurrencies is a possibility to get free certain quantity of coins or tokens during ICO. Of course, after the successful start of the project these tokens can turn into real money and later with the growth of the cryptocurrency’s popularity it can also be a serious income.
So, what are the conditions of distributing tokens among the active users?
- Activity In Social Nets
Usually, they use Twitter and Facebook. They should subscribe to the account of the cryptocurrency project on the site and constantly like and retweet posts from the official page of the company. The more followers or personal subscribers a person has, the more coins he will get for his actions. The best thing if a person has from 1000 to 4000 subscribers. At Facebook you will have to do similar actions – subscriptions to the page, reposts, writing your own advertising posts. It’s also important to have many own subscribers – better a few thousands.
- E-mail Subscription
You need to visit the company’s site, enter your e-mail address and confirm your subscription.
Projects require high-quality translations of various texts, subtitles to videos, the whole websites, news, letters, the presentations, etc. And translations are required in different languages.
- Forum Activity
It is often necessary to be users of professional forums, for example bitcointalk.org, so you should have an account on that website. Here is a special system of ranks which reflects the rate of user’s activity on the site. The bigger rate a user possesses, the bigger amount of tokens he will have. People can also be awarded not only for posting but also for using the company’s logo as a signature at forums.
- Writing Texts
A person can write an advertising article, upload it to his own website or send to popular cryptocurrency blogs.
Such actions as checking for defects and bugs, development of logos, various program development, creation of the website and other specialized services are also required.
Conditions of a bounty are published or in a main topic on BitcoinTalk, or in additional with a prefix [Bounty].
After ICO bounty-managers check these activities and distribute tokens on purses of participants of the campaign.
- Adding Project to ICO Trackers
There are a lot of services on market which accumulate information about ICOs.
Such services analyze investment risks of the project coming to ICO in the following directions:
- business model (its relevance, strengths and weaknesses);
- market niche (opportunities and dynamic of development of the chosen market niche for business);
- team (business experience in a traditional market segment, in a blockchain-industry, experience in blockchain projects);
- competitiveness (level of competitive pressure from companies with similar business models from traditional market and a blockchain economy);
- technical background (availability and quality of a prototype or source code);
- analysis of feedbacks from community and many other aspects.
Thanks to trackers investors can consider all the risks of this or that investment.
After checking the information about the project, trackers publish it on their sites. Some platforms can ask money for publishing or for the detailed overview — about $1-3 thousands.
Main trackers list:
- PR-company And Advertising
Effective PR-strategy plays an important role in the success of the project. It’s better to find specialized agencies for this purpose and organize various meetings and conferences.
There is a similar campaign before the start of ICO which is called Road Show. It is a part of practical training of the company before issuing its securities.
In financial economy Road Show is a number of meetings with potential large investors and analytics from the core cities of the world. As for ICO, its PR-company lasts usually one-two months. It is oriented on wide range of investors and not just large ones (like banks, fund and others).
Target audience in this case are participants of crowdfunding programs, so-called “angel investors”. Such investors are likely to support projects where they can apply their own experience. Personal involvement and expert knowledge are those features which distinguish them from other private investors. There are many businessmen among “angel investors” who provide external finances in their own projects. The investments received from this group are called “angelic”.
Use any source of traffic which you can work with to report information to the audience. Your main goal is to make tokens be sold out the first day (hour). Potential buyers should visit your site or social channels, admire the information and mark in red the date of ICO in his calendar.
What can be done for this purpose?
Limit a maximum amount of investments. It is a good sign for investors: you don’t take away all possible money from the market, and you collect as much as you need for development. The fewer amounts of the raised funds are, the more chances they have for the multiple growth of investments.
Grant bonuses or discounts to first investors or at certain time. It also helps to create agiotage. Write about your great popularity in all articles, blogs and social channels. Publish data about the number of email-subscribers, participants of social channels, forecasts of analysts about great demand on your tokens.
- Creation of a Personal Account For the Investors
The main functions of such account are acceptance of cryptocurrency, transfer of the issued tokens to a purse, settings. Additional functions are ability to download identification documents, additional protection, and different timers. We recommend hiring specialists who have experience in such field for working out personal account for users.
- Translation to Other Languages.
You can do it with your own specialists or during bounty-campaigns. Among popular languages are Chinese, Japanese, Korean, Russian, German, and French. It is better to translate your site totally. As for Whitepaper you can translate just main parts (remember just a few English speaking geeks read the full version of the document).
14 Issues of Tokens
There are not so many options: you can release tokens on Ethereum platform, on the Waves platform or your own tokens. It’s recommended to consult a specialist to release tokens. Though Waves declare that it is very simple – so you can decide whether to try or not.
There are two ways of issuing tokens using blockchain:
- You can first collect the amount determined by the offer and then issue tokens and divide them in proportion between all investors. As rule, there should be a special site with an account of the investor.
- You can also sell tokens on cryptocurrency stock exchanges. So, in this way you will have to issue them in necessary quantity beforehand and sell on several exchanges at the same time. In this case process of ICO becomes identical to traditional process of the IPO.
Legal status of the of token’s issuer
The main goal of ICO is raising investments to the project. The key-feature of ICO is raising cryptocurrency not fiat currency. It reduces risk of getting attention of regulator as such activity cannot be considered as issuing securities. However, such approach deprives investors of the rights which they possess in terms of traditional investment activity.
It is possible to legitimize relations between the issuer and the tokens holders signing an investment agreement. This agreement divides shares of profit, so investments can be made in exchange on a share in the profit of the person realizing the project.
According to such agreement it is possible to impose a number of liabilities on the receiver of investments which are typical to dealing with digital tokens:
- To pay out all necessary funds to investors in case of circumstances provided in the agreement such as for example achievement of business indicators (revenue/profit)
- To repurchase tokens at the calculated price
It is also possible to impose on issuer an obligation to convert tokens into securities or a share in the company in terms of such agreement.
Usually a large number of people participate in the ICO and the transactions are arranged with use of the Internet, so there should be special requirements to observe conditions of signing the contract. The most convenient method of signing the contract in this case is acceptance of the conditions provided by the offer. To avoid disputes with signing the agreement, they should clearly write down all actions which will be considered as total acceptance of the offer (registration on the site, creation of a digital purse, money transfer).
If investments have already been raised to the project by ICO and the rights of token holders were not clearly distinguished it is worthwhile to pay attention to the risk of raising new traditional investments. Such uncertainty can make the process of raising funds from traditional investors (business-angels and venture funds) rather complicated. It increases legal risks because owners of token can claim on the company.
Legal status of token holders
Legal status of the ICO participants is not legally determined, so we should speak about rights using the fixed conditions of the agreement. The offer will determine the rights of token’s owners if they will be granted at all.
Provided that the offer is properly arranged and both parties have certain commitments, investors should take into consideration that they can make very little impact on the economic activity of the token’s issuer.
There are no legal ways to protect token holders in case of liquidation of the company or holders wish to exercise their rights in voting or in profit distribution, because token holders are legally not shareholders of the company. Actually, investors’ protection will be limited to a possibility of claiming to refund losses if any will be.
- Carrying Out ICO
It is highly recommended to arrange a 24 hours work of specialists of all directions in the day of ICO. Even at the start your site can be attacked by hackers who will change purses for money transfer as it happened to Coindash ICO on July, 17.
You should monitor fund raising, stir interest in social channels to create a final agiotage. Use everything that you have learned for the several previous months.
Recommendations for companies which are in the process of ICO or getting ready for it
Distinguish your promises and point them out precisely in the offer. Be very cautious with whitepaper and T&C – everything which you will write there can be a basis of future claim to your company.
As it really difficult to consider everything, choose at least with proper law. Choose jurisdiction which regulation is mostly similar to what you would like to write. Let its legislator help you to fill gaps in your conditions.
Write your code fairly, but leave at least a possibility of judgments’ performance in the contracts. If you receive a judgement forcing you to return funds to the investor and they will be locked on the smart contact only you will be blamed for it.
Don’t lie to investors, and don’t do anything that is similar to a lie. ICO itself causes many suspicions in the society.
Settle down the way of solving disputes. You can register cognizance of national court of the specific state or submit a case to commercial arbitration. At the same time you should be ready to the fact that the arbitration clause cannot work if the relations are recognized as consumers. The state can ignore the award of arbitration if it contradicts a public order.
The main advice is not to underestimate the national legal system and law in general. The legal principles were created not just one millennium, and it will hardly possible to get rid of their jurisdiction so quickly (or to ignore them at all) as many crypto enthusiasts believe.
There are only two options of regulation of the relations in the world: either subordination to force of the law (agreement), or law of force.
And it by all means better to choose the first option no matter what development of information technology can provide to you.
Nowadays a few projects which arrange ICO have potential to grow to enormous size and investments to them will get regained many times. Many investors today remember about IPO of such companies as Apple, Amazon or Google and think what fortune they could have made if they had invested into them at that time. Today ICO market gives one more chance to participate in the history of success of new economy projects, both for investors and for founders of the companies who really want to create significant projects.