How to ICO — A List to Consider
By: Beryl Li, Founder at CapchainX
Many ICOs have failed (raised much less than intended) and will fail (will most likely disappear in the secondary market due to lack of fundamentals) but if done well, its not impossible to end up with the same fate as FileCoin and Tezos raising up to 200m USD in its token sale (primary offering).
You should allocate time for:
a.) time it takes to market your plans about your product and token sale to token buyers effectively (ex. Reddit, LinkedIn, Crypto community, conferences, Medium blogs, potential customers, Token funds).
b.) time it needs to prepare your white paper, updated website, product demos, videos, blogs and other materials to communicate the potential of your product.
c.) time you think your token buyers will need (ability) to pledge during the token sale throughout the auction period.
This can take from a month to a year depending how many followers you have, how active they are in the community, your existing customer base, your reputation as an entrepreneur and access to cryptocurrency investors.
You do not need to force yourself to have blockchain features if this is not your competitive advantage just for the sake of doing a token sale.
ICO fundraising have originated from decentralised organisations — blockchain related (early adopters). Today, non-blockchain companies are mirroring this fundraising strategy. Tokens are becoming more mainstream that even non-blockchain and crypto participants are starting to consider this method so do not force yourself to be in the blockchain space just to feel “legit”. Otherwise, its baffling.
a.) Problem youre solving
b.) Competitive Advantage (whats so special about your token sale and product?)
c.) Product roadmap
d.) Team (Can this team make it happen? token-vesting plans?)
e.) Token details (ex. mechanics, distribution, demand and supply economics, fundamentals)
If tokens in general get regulated, how do you protect yourself ?
I would highly recommend adopting strict compliance and forget the mindset of doing it now while its not “yet” regulated. Why? Because if it gets regulated you can experience fines, imprisonment, or worse, adopt compliance policies later on when you’re busier with your already growing business. I would take care of it now by looking for that optimal point of complying and getting things done.
a.) Worse case scenario modelling depending on jursidiction
b.) Perhaps set up another entity in a less stringent jurisdiction?
c.) Going through the process with lawyers to note necessary KYC or exemptions to adpot (based on jurisdiction. UK/EU is actually not bad after putting together an exemption list with lawyers in the field)
d.) Term sheet for your auction token sale
e.) Any revised BOD or memorandum agreements
Just how fiat currency was once backed by gold or a basket of more stable currencies. The appropriate fundamental for tokens is company equity. Token buyers are buying the potential of the team and the idea behind product, and the probability of success.
The prices of your token should not only factor in your Demand and Supply economics, but also the factors that affect the valuations of your startup (team, market, economy, product). Also whats the probability of someone to redeem something illiquid from something already liquid in the form of tokens? In short, enoy the benefits of tokens while backing it with real fundamentals. This is why my startup, CapchainX, is backing the concept of Crypto Equity (tokens that can redeem emitted shares). Exciting huh? :D
How to fail immediately:
a.) Attaching your tokens with voting rights and claim to asset/revenue can cause you unecessary regulatory constraints for failing the Howey and Reves tests.
b.) Representing credits for product usage is hard to measure causing unreasonable valuations. This is a complex way of valuing your tokens (why make it so difficult?!) Moreover, buyers may not even use product making it even more complex to measure the real potential of your product. But if your numbers make sense without having to use spreadsheets to see patterns in your numbers, why not? I would still prefer taking out the complexities of the valuation if possible!
Please do not create artificial supply, scarcity to revamp demand, print tokens whenever you want, and solely rely on demand and supply for the price of your token.
What to think about:
a.) Decreasing discount rates during token sale
b.) Valuation Floor and Cap for token prices given authorised supply
c.) Auction mechanism
d.) Incorporating factors influencing your token prices on the secondary market (unique per company)
Your success highly depends on how successful your marketing campaign is. Really.
How companies in the past did it:
a.) Some of these successful ICOs don’t even have product. Team members don’t even have a track record. So how did they lure investors? Style and strategy of their marketing campaign.
b.) Reach out to every single angel investor whether in crypto or in VC to let them know your token sale exists. Visibility.
c.) Sprinkling complex terms on the white paper (Not recommended. Communicating simply is key.)
a.) Creation of tokens. Are you using Ethereum smart contracts?
b.) Escrow set up for auction (how is this embedded on your website? Is it prone to hacks — can easily change the wallet address?)
c.) Database of the distribution
d.) Transfer of fiat/crypto for tokens at a determined price after auction
Questions and comments — i’d love to build this list over time. Send me an email beryl.li@capchainX.com!
Originally published at medium.com on August 31, 2017.