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Private Sale or Public Sale?

What Is an Initial Coin Offering (ICO)?

When taking a closer look at the buzziest trend in the cryptocurrency market, one of the first terms that comes to mind is Initial Coin Offering (ICO). Presaling coins of a cryptocurrency or token of a blockchain project has become an effective method of raising funds for the development of a new application.

The main idea behind an ICO is the ability to offer investors crypto tokens and sell them in exchange for cryptocurrencies like Bitcoin or Ethereum. Participants can sell or trade their assets on all cryptocurrency exchanges at 3 or even 100 times the original price.

A utility token can be exchanged for goods or services on a certain platform. William Mougayar, the author of The Business Blockchain, stated that a token is “a unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders.”

By its nature, an ICO is similar to an Initial Public Offering (IPO), in which investors buy shares of a particular company. The main difference between an IPO and an ICO is that token holders don’t possess equity in the company from which they have bought the token. The company is not responsible for any circumstances and has no real obligations to investors.

What About Benefits?

An ICO is considered an alternative form of investment, and offers a lot of advantages for businesses:

  • a variety of opportunities for up-and-coming projects
  • no paperwork
  • the ability to create a community of project supporters
  • extra incentive for innovations
  • access to potentially valuable tokens

ICOs are a relatively new phenomenon, but since 2013, this means of fundraising has been getting more and more perspective. With the success of Ethereum, ICOs have become accustomed to raising capital for the development of crypto projects by issuing a token that is integrated into the endeavor. In this way, the ICO has become a tool capable of revolutionizing not only the currency market, but the whole financial system.

Are ICOs Successful or Not?

2017 was the definitely year of the ICO’s boom. A total of about $4 billion was attracted. According to CoinSchedule, companies raised investments worth $12.4 billion for their businesses, and the number of successful token applications reached several hundred globally.

Let’s take a look at the ICO market in millions of U.S. dollars:

Also, let’s discover which countries were the most favorable for ICO launches in 2017:

Dozens of ICOs launched monthly are competing in an attempt to create the most creative way to apply a token into a project and leverage smart contracts to add more features to these tokens.

Despite their numerous advantages, many people still consider ICOs too shaky to run a business on, and there is a lot of controversy arising from fraud, theft, and volatile speculation.

It is important to say that not all ICO projects are successful, and some fail due to poor organization. Consequently, the issue of ICO regulation arises.

Financial authorities are warning investors worldwide, explaining that initial coin offerings may lead to loss because of vulnerability to fraud. Consequently, many countries impose bans and restrictions, given that ICOs are fertile ground for scammers.

Do not worry. We have prepared a list of the most ICO-friendly countries so you can choose where to launch an ICO if you intend to do so. In fact, you may wish to do so after all the positive things stated above about ICOs.

After all, remember that if something is talked about a lot, it is definitely worth paying attention to.

How to Raise Money With an ICO

The standard steps for business development are:

  1. Find the idea
  2. Create a beta version of the product
  3. Run a private sale
  4. Conduct a pre-sale campaign
  5. Go public

In general, there are three phases to the token sale:

  1. Private sale
  2. Pre-sale
  3. Public sale

The choice depends on the individual purposes of the ICO:

  • The way the country where you are going to run the ICO treats ICOs
  • Which regulatory policies it follows concerning crypto-based businesses

ICO founders are required to pay compensation for damages in case of any failure. Serious investors avoid working with partners who do not provide legal certificates and written guarantees. That’s why an ICO license is the only way to solve the problem.

With a license, one can legalize an ICO and its released tokens. However, the procedure is very tough. To obtain a license, one has to prepare a whole package of documents, including the Terms and Conditions, dispute settlement policy, KYC, AML, and other documents required by the regulator. In this way, ICOs are fully checked and analyzed. This analysis includes the business structure of the ICO and its real chances of its implementation.

The list of required documents includes:

  • A full description of the ICO and its purpose
  • An investment budget description
  • The predicted amount of money raised
  • The economic/legal basis of the token
  • The real need for the token. It should be mentioned that not all projects need a token. If you are experiencing a lack of $1–3 million in investments, it is recommended to go for a private sale in order to attract funds for the business. If the budget of your project is $10+ million, do a public sale to develop your product and gain greater profits.
  • The audience. For example, a public sale is focused on serious stakeholders who are, mainly, a part of the crypto community and ready to invest a large amount of money. When running a private sale, you can govern who can participate in the token sale and set your own requirements.
  • Market awareness and team experience: the ICO’s projected lifetime and its chances of standing out from the crowd of other blockchain-based projects.

Let’s talk more about ICOs, and find the answer to the question: private sale or public sale?

Private Sale

The ICO presale period is the process in which tokens that are not yet announced to investors or open to the public are sold. As a rule, ICOs set strict requirements for participants in a private sale. They might do video calls or interviews to make sure the investor is aligned with the ICO’s goals. Bonuses depend upon the size of the contribution.

Advantages:

  • big bonuses and discounts compared to presales and crowdsales
  • the ability to get a quick return if a token purchased at a discount is sold at the price of the ICO when token trading begins
  • more chances to buy tokens compared to crowdsales and presales, as a private sale focuses upon investors at the institutional level

Disadvantages:

  • higher risks due to the unpredictable nature of presales and crowdsales. Also, the ICO’s product has no MVP at this stage
  • the instability of cryptocurrency assets, which negates bonuses and discounts compared to the crowdsale
  • no possibility to refund money if the ICO doesn’t hit soft cap during crowdsale or presale
  • higher minimum contribution than presale or crowdsale
  • possible locking period for tokens or bonuses
  • stricter KYC and background checks. In this way, not everyone can be accepted, regardless of minimum contribution and accredited investor status
  • less token liquidity, as the token release usually takes a long period of time

ICO Presale

ICO presale is a phase carried out before the main crowdsale. It is advertised on different websites, social media platforms, and (possibly) through advertising. In general, an ICO presale is a great possibility to get a higher discount or bonus compared to a crowdsale, and avoid experiencing drawbacks or risks that might happen during a private sale. Bonuses and discounts depend upon the level of contribution.

Advantages:

  • more beneficial discounts on tokens compared to crowdsale
  • assurance of token purchase, as some ICOs might cancel the crowdsale
  • the ability to buy more tokens, as the ICO presale focuses on bigger investors, as a rule
  • get a quick return if tokens bought at a discount are sold at the ICO price

Disadvantages:

  • a higher minimum investment compared to the crowdsale
  • higher risks of immature product or company
  • some ICOs are at a very early stage in their development
  • risk of cryptocurrency reappreciation devaluing your tokens
  • a lack of token liquidity while waiting for trading
  • it is quite difficult to evaluate the success of the ICO based upon the presale
  • fewer tokens are sold during the presale, which means that the most advantageous get sold out fast

ICO Public Sale

An ICO crowdsale is the most important stage in the entire ICO path to success, so it is advertised and promoted more widely than the presale. As a rule, it provides the lowest risk of the three types of ICO sale. However, there are also lesser bonuses or discounts compared to the presale or crowdsale periods. The bonus and discount system is the same as in the previous two campaigns, and is based upon how early the investor contributes and how large the contribution is.

Advantages:

  • the ability to predict ICO results based upon presale and private sale outcomes
  • lower risk, as the product is more developed
  • lower minimum purchase amount compared to presale
  • tokens have greater liquidity, as there is less time to trade the token
  • less possibility of a crypto volatility increase that affects the price of the cryptocurrency
  • easier KYC, as many crowdsales do not demand accredited investors

Disadvantages:

  • lower discounts
  • possible lower maximum cap per participant
  • crowdsale can be canceled if tokens are sold out during the presale
  • the possibility of token-dumping when bought at a discount

Conclusion

The potential of ICOs is immense, as they enable everyone to release freely-tradable tokens to raise capital for project development.

For those who have decided to run an ICO to raise capital for a startup, it is recommended to choose the right path for your ICO sale and participation. Both private and public sales are good, but one of these can help make a higher level of income easier, cheaper, and more profitable for your individual project.

Learn all the risks in order to choose the best ICO sale for your project and achieve the results you want. Undoubtedly, this will take a lot of time. However, proper planning and analysis are what every ICO needs.

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Applicature is a Venture Builder and Accelerator of Blockchain companies. Since 2017, we’ve helped more than 270 companies grow.