Total ICO funding for 2017 surpassed $3 billion in October. With the number of ICO campaigns on the rise, the community is facing high competition for the attention of investors, which has started to reflect on the number of successfully funded ICOs. 66% of the ICOs in September 2017 missed their goal for different reasons. While some were maybe too ambitious, others lacked a good marketing campaign, or the team and product were not convincing. Early movers in the ICO space got lucky, raising millions of dollars in a matter of minutes or days, but with rising competition, this won’t necessarily be the case for all ICO’s to come.
Given the Blockchain industry is relatively new, there isn’t a whole lot of information on the topic (from a project’s perspective), and with each new ICO, teams are learning best practices on what to do and what not to do.
In Europe, Switzerland has seen the highest number of ICOs, with a total of 13. This is just ahead of the UK, who had 8 ICOs and a total of $71m in ICO funding. In Europe also average ICO round-sizes are the highest when compared to all other stages of funding.
What is an ICO
An initial coin offering (ICO) is a means of crowdfunding, through the release of a new cryptocurrency or Token to fund project development. There are currently around 1,500 coins available on different exchanges, with many more in the process of being listed on exchanges.
Important differences between ‘coins’ and ‘tokens’
In the simplest form, what is supposed to power your Application, is more like chips at a casino, or a donation for access to a product on Kickstarter. If you are issuing a token, the more appropriate nomenclature for this emerging process can be better expressed as a ‘Token Generating Event’, or a ‘Token Donation’, as under certain jurisdictions, this is a specific and distinct definition, that aligned with the proper structure, provides clarity to the authorities on what exactly you are doing with your coin/ token launch.
To keep clear of SEC, or various other Financial Regulators of other jurisdictions you need to identify whether your coin/ token is a security. The de facto standard is the ‘Howey Test’, which was created by the US Supreme Court for determining whether or not certain transactions would qualify as ‘investment contracts’.
You need to identify the nature of your token for the following parameters:
Is it an Investment of money? From an expectation of profits?
Investor commits his or her assets to the enterprise in such a manner as to subject the investor to financial loss. Although the term ‘money’ is used, this has expanded to include investments of assets other than money.
Is it arising from a common enterprise?
A ‘common enterprise’ means that investors pool their money or assets together to invest in a project and the model concerns whether any profit that comes from the investment is largely or wholly outside of the investor’s control.
Is it dependent solely on the efforts of a promoter or third party?
If the investor’s own actions largely dictate whether an investment will be profitable, then that investment is probably not a security.
The promotional materials associated with your sale will be examined in determining whether it is a security, and therefore you should review all your offering documents, your website, and your token terms, so that no language misrepresents what you are offering to your community.
E.g. what the investors are being offered or promised, how the offer is distributed, and the economic inducements held out to the prospect.
If the material promises ‘great returns’ or ‘guaranteed income’, regulators will almost certainly find the instrument to be a security, and therefore subject to securities regulations in almost all jurisdictions.
Use this Howey Test Template developed by Coinbase where you can do your own assessment to see whether or not your token is a security.
Now that you have the basic idea, lets deep dive. You can divide your ICO launch into 3 phases:
PlanningBefore the ICOAfter the ICO
Planning the ICO
You must identify what is the purpose of your token and why does it need to be on the blockchain. If your application doesn’t need to be built on top of a blockchain protocol, you should think hard before moving forward. The computational costs of building an application on top of Ethereum is much more than on something like AWS. You need to have a strong reason for why you are building a decentralized application vs. a centralized application. Building a decentralized application is fundamentally different than an application using client-server architecture, and you’ll need to fully understand the components of a blockchain and what can be built on top of this new architecture.
You must also understand that:
All your actions will be reflected in the price of the token.Your team will get bombarded non-stop, multiple times a day, with questions about the price of your token.You’ll need to be an international company from day one.All your internal team discussions will likely be pushed publicly.If your product isn’t open sourced already, there will be a huge backlash to become completely open sourced. There is a strong expectation that many blockchain projects are open-sourced projects. Typical projects are way more public/transparent than startups, or even traditional public companies.
Now that you are ready, you’ll need to answer the following questions.
How much do you want to raise? & Why?What do you want to accomplish with the token sale model (http://vitalik.ca/general/2017/06/09/sales.html) you are choosing?What % are you giving to your team, investors, partners, reserving for the ecosystem, reserving for the company/ foundation?How are you going to use the money that you raise? You should have an annual budget for the next 5 years.Do you want a cap? If so what cap will you set? This depends on the amount you are targeting to raise, as per the first question.What currencies will you accept? (BTC, ETH, anything else?)Do you want to do a pre-registration?Will you be offering rewards for getting in early? Tiered pricing?How long will your offering be for? (1 day, 3 days, 1 week etc).Will you be geo-fencing? (excluding specific countries from participating e.g. sanctioned countries.) A lot of projects exclude both US and Chinese investors.Will the tokens be released right after the token sale is complete? If not, when?Will you allow funds/institutional investors to invest or only individuals?
KYC and AML
Crypto space is very attentive to privacy. However, as the technology goes ‘mainstream’ it runs into real world laws. In almost every jurisdiction, no matter what legal definition is placed on cryptocurrency, you will almost always be required to follow best practices in KYC and AML laws.
Identity, location, nationality, and over a certain transaction level- where did this money come from?
Current best practice is to not offer any tokens to US citizens, simply because the SEC is impossible to second-guess. Standard practice is to blacklist American IP addresses and send them to a non-sale site, exclude them from your newsletter, and say you’re not offering tokens to Americans. Certainly, this make sense if your token looks or smells a bit like a security.
The whitepaper is where everything comes together and is synthesized in one key document. The whitepaper should cover how the whole system works and how the token will be used within the system. You need a semi-technical explanation of how your project works and an easy to understand walk through for non-techies. The whitepaper should be appealing to investors with no technical knowledge and developers alike. It needs to include:
Credible technical roadmap.
Plausible business roadmap.
Clear token distribution model.
It should give a prospective contributor the full picture of your application such that they have enough information to make an informed decision.
Whitepapers are trying and can easily take 200+ hours of work from the whole team in a very short period. This is also the one document where your team must take ownership in creating this document. Most of it cannot be outsourced- editors can help clean it up, but your team needs to write the document.
The more sophisticated crypto/ blockchain companies will offer a Yellow paper, or a second ‘technical’ white paper like the Ethereum’s Yellow paper or Zcash’s technical whitepaper. These papers give a further insight into the technical implementation and are only aimed at people with deep understanding of blockchain technology.
Technical papers have so far mainly been used for blockchain token sales and not for dApps token sales.
You will be more credible if you already have a product prototype. Encourage people to visit your GitHub page and play with the code. Projects without a single line of code raise many red flags in the eyes of investors.
From an investor’s standpoint, a great team behind the project is one of the most important factors when deciding on contributing to an ICO. Conversely, an unproven, or worse still, an anonymous team is likely to serve as a major red flag and stop people from investing.
Diversity is also a key aspect. Don’t focus on business people only. If you want investors to take you seriously, make sure you have good developers on board. Also, choose your advisors wisely. Supporters should be able to see who you are, what your background is, and be able to understand how your background and capabilities lend to the type of technology you are developing. Founder’s images and bios should be online, transparent and available to review. This includes your advisors. People trust people they can research; they want to see faces.
And make sure that they all agree being part of your team. There have been many misunderstandings in the past regarding advisors who found their faces on different web pages and had to publicly announce that they do not endorse these projects.
Website/ Social Media/ Blog/ Community Channel
With a long-term approach, put yourself out there and stay engaged with your community. Many projects promoted Slack as their primary communication channel. Unfortunately, Slack became a tool for the scammers to trick people into sending funds to false addresses. Many projects noticed that and moved to other platforms such as Telegram or self-hosted solutions to stay relevant and connect to their supporters, users, and developers.
People must feel like they know who you are, and you are accessible to them. The most successful token offerings and platforms have a maniacal focus on their communities and realize that the value of their network is an intrinsic element of their sustainability.
You should also answer questions and give interviews. A very powerful technique is hosting AMA (Ask Me Anything) sessions on Reddit or Quora. Be prepared to answer provocative questions. Furthermore, there are many blockchain related podcasts such as Epicenter (https://epicenter.tv/) or The Ether Review (https://etherreview.info/) where founders come on the show and talk about their project and their vision. This is a great way to drive attention towards your project.
Allocate budget for bug bounties. Take a look at 0x Protocol bug bounty. It’s not unusual to see an ICO dedicate 2–4 percent of tokens to payment of bounties (under the marketing budget).
This is not an exhaustive list. Do consult a security engineer who has handled ICO before.
Buy all the website domains and the TLD variations of your name.Keep an eye for potential scams where hackers try to re-create your landing page with a domain name that is similar to yours.Register all the social media accounts of the names that look like yours.Scammers may copy and spoof your social media accounts and point them to a different landing page than yours. They may also try to ‘extending your crowdsale’ and trick potential supporters. Keep an eye.Setup Cloudflare on your landing page.Setup two-factor authentication for your own internal team to make changes to your website and monitor your site extensively. Restrict the ability to change/ commit to your page/ Github/social media.Turn off the Slack API. Slack isn’t set up for public groups that are raising funds. There have been scam attempts involving Slackbot messages which admins can’t turn off and a lot of people fall for - despite all the warnings. If you’re using SlackArchive, disable and delete.Tell people to bookmark your site, don’t click on links.Don’t release your wallet public address until the day of the ICO. Release simultaneously on all your communication channels at once.Remind people NOT to send in their contributions from exchanges like Coinbase. It needs to be from a wallet they control (e.g. Metamask).
Before the ICO
If you are doing a registration based ICO, release all the details and have people register beforehand.
Create a tutorial for the registration.
Release a tutorial video and tutorial blog post on how to participate.
Watch out for all potential hackers.
Websites that List Upcoming and Ongoing ICOs
ICO Watchlist (Highly recommended!)Smith & CrownsICO AlertCoin ScheduleICO RatingICO TrackerICO BenchICO List
After the ICO
Listing on Exchanges: The exchanges are being bombarded with requests to list tokens. Most exchanges have an application page. They want to see that you raised quite a bit of money and there is strong demand for trading. They want to see that your smart contracts are verified on Etherscan. They want to see your tokens on a blockchain explorer. They have other requirements you can’t meet until you’ve issued, so you have to communicate with your buyers while you apply.
At the same time, various exchanges will list your token for sale anyway. EtherDelta is a peer-to-peer exchange, where anyone can offer any tokens or currencies for sale.
Once you have raised your funds, you’ll need to decide how much of your contributions to cash out into fiat, and how much to stay in crypto. You should also start the conversations with banks early on, so you don’t run into issues when converting funds from the token sale to fiat.