An ICO, or Initial Coin Offering, is an (almost) unregulated way for startups to raise funds directly from the public, and finance the development of a project.
In short, the way it works is the following. A company will create and release digital coins, and put them for (pre) sale to individuals who will then use those tokens to purchase services or products from that company.
People who want to participate to the ICO (also called a crowdsale) will usually exchange other cryptocurrencies, such as Bitcoins or Ethers, or sometimes even fiat currencies (USD, Euros…), to buy the issued tokens.
There has been a huge number of ICOs recently, and a big part of them are projects that will probably never take off, or even see the light. According to coinschedule.com, there are 148 ICOs in 2017, raising $2.2bln, compared to 46 ICOs last year, that raised $96mln (as of 9/26/2017).
Our company, InnovaChain, has received, over the past 4 weeks, a tremendous amount of consulting requests to launch and conduct ICOs. Except that 50% (at least) are not serious and for various reasons. Either because the “client” thought that was an easy way to hire a consultant, get the job done, and raise millions in a couple of hours, or because the business model could not integrate the blockchain, or just because there was no business model at all!
Now, and assuming you have a real project with a real business model, if you are thinking about funding your venture through an ICO, here are some key points to consider. We have compiled some best practices and prepared guidelines we use to advise our clients and manage their ICO project.
First thing to keep in mind: to launch a successful ICO, you will need to build trust among your audience, and have a clear understanding of some risks dealing with people’s money!
Even if ICOs fall in a regulatory grey area, make sure you understand the risks and the continuous evolution of the regulations (cf SEC and security laws in the US, recent ban in China…).
Now, here are our guidelines for preparing and launching your ICO:
1 – is an ICO right for you?
To be successful with an ICO, you must have…a valid business idea! You need to identify a problem where the use of coins brings value to the solution you provide.
Most effective ICOs usually involve technology projects related to decentralization or cryptocurrencies, attracting investors familiar with this kind of environment.
ICOs offering a clear value on how to use their tokens (see past ICOs like Ethereum, ICONOMY…) and demonstrating what are the economic incentives with their token strategy are the most successful ones.
That’s why you should have answered some basic questions about your token model.
What is the role of your token?
Will it give a right to vote, or some value to exchange?
This will have a huge impact on how your campaign will be qualified, and if it falls under security laws (tokens should be “consumed”, and not advertised as shares or a right to future earnings).
As for any new venture looking to raise money, you need to show your “magic sauce” in your business plan, what challenges are you solving and what makes your solution unique.
Take the time to validate your business model and run various assumptions (at least one conservative and one aggressive), highlighting the added value to integrate the blockchain technologies in your solution, and how your ecosystem will work.
A more complex feasibility study must be performed on your cryptoeconomics, and the structure of your token strategy (see below).
2 – Build a strong team.
Being transparent showing who is doing what is crucial to inspire trust.
Listing clearly all major team members, developers and advisors, with their profile, will help your community and early adopters to assess the credibility and likelihood of success of your project.
As in any fundraising campaign, the most important topics to your audience are the team, the goals and the capacity to execute your vision.
Managing your crowdsale will typically require the following team:
1 project manager,
2 community managers,
1 bounty manager (can be the community manager),
a PR specialist,
an add specialist that will specifically target your audience on Fbook, Google, Reddit, and YouTube.
3 – Setup a legal entity.
Let’s go back to the basics: any (serious) company should setup a legal entity (llc, foundation…), and declare a jurisdiction. Selecting a token friendly jurisdiction (Malta, Singapore, Switzerland…) with a regulatory sandbox might be the ideal scenario.
Make sure you talk to your lawyer on that subject.
4 – Show your Proof of concept
Being able to showcase a working product to your audience is by far the best scenario to gain traction and build trust within future buyers.
5 – Share your White Paper and a roadmap.
Those two documents are crucial.
Your white paper will clearly define the background and technical aspects of your offer, the problem you want to solve, and why people will choose your solution.
It is essential for buyers to understand the characteristics and features of the token they are buying, the risks and the benefits of your platform or network.
The roadmap should list clear and realistic goals, including estimates of time and costs for each development step.
6 – Define your crypto-economics and crowdsale process:
Here are some questions that are crucial to any ICO:
What is the amount to be raised and what will be the initial value of the token?
Will your token sale be capped?
How many coins will be issued? Distributed?
What will be the offering period?
Will you launch a pre-sale before the main sale?
What will you do with the funds? List the expenses, development costs and their time frame to give as much visibility as possible.
Once the sale is concluded, the smart contract will be deployed, tokens will be issued and delivered to the purchaser’s wallet.
Using an open source software, a public blockchain, and a well-known smart contract platform, such as ERC20, will provide transparency and reinforce trust.
7 – Define Terms and conditions.
Defining risks, uses, warranties, liabilities and other legal issues is key as it represents the legal communication between you and the public.
Make sure to adopt the same cautious and consistent approach in your overall communication (don’t post “guaranteed returns” on social media!)
A common rule now is to reinforce your participants’ confidence by collecting all contribution in a multi-signature escrow wallet, and define a process for the returning of the funds in case of failure.
8 – Plan your communication strategy.
Building your audience and getting enough attention becomes more and more difficult as the ICO market is growing.
Make sure to define your Go-To-Market strategy and constantly communicate with your targeted audience, before and throughout the ICO.
Main channels are social media, forums, promo videos, live webinars, and of course an ICO website dedicated to the event, as this will be the main source of information for you audience. Your landing page will include all the information and documents available to potential participants, and the tool for purchasers to acquire the tokens.
An ICO campaign requires a dedicated team to manage your social network presence, answering questions, providing detailed explanations to dispel doubts, monitor reviews (good or not).
Some must-have platforms to engage and provide a continuous interaction with your audience are: opening a thread on bitcointalk.org, add your ICO to ICO trackers, Slack and Telegram are the most important channels to communicate directly with your community.
9 – Avoid troubles!
Make sure you take all necessary actions to avoid breaking the laws, and losing your audience’s trust.
Hiring the services of a lawyer while preparing your campaign is strongly recommended. Dealing with AML/KYC, security, commodities and money transmitter laws is no fun!
Also lack of transparency might be perceived as a potential scam, so be sure to show continuous work-in-progress information about your project.
Conclusion:
Raising funds via an ICO is now part of the overall blockchain ecosystem, and new ICOs are launched every day. But pretending to be a crypto-entrepreneur with a 5-page white paper won’t give you access to easy money, and might expose you to serious risks.
Regulations will increase, and as long as it does not prevent innovation, this is mandatory to protect investors.
Other striking reality check: many blockchain entrepreneurs lack business experience.
Their technical skills might be impressive but don’t forget we are talking about a setting up a successful business. Raising funds is just the beginning of the story. What will you do once you have your $millions ? Creating the concept is one thing, execution and team leadership require other set of skills.
Disclaimer: This article is for informational purposes only and does not constitute legal advice or instruction. You are responsible to assess potential risks using tokens and cryptocurrencies.
