The Different ICO (Initial Coin Offering) Stages
When a company wants to supercharge its growth and lack funding, there are many ways it can the raised fund. One can borrow from friends or family, get a sponsor, form a partnership, sell shares on the exchange, or get a loan from the bank. However, funding source can highly be determined by the size or strategy of the brand. Cryptocurrency has gained ground, and many big companies adopted the ecosystem. Many big brands that are versatile and loves technology have platforms based on the Blockchain technology because of its smartness and other the set of advantages it possessed.
For any commodity to be called “money” and used as a means of exchange, it must be accepted widely by the community. As the stories of successful crypto investors are being heard, the acceptance kept increasing. With the advent of this digital money called cryptocurrency, many people have invested their traditional cash in it by converting them to Bitcoin, or Ethereum to make a greater profit when their prices go up. With this, big companies and small startups started raising funds from investors in the crypto sphere through what is called Initial Coin Offering (ICO).
Initial Coin Offering is a crowdfunding method that new cryptocurrency companies used to raise capitals to finance their projects. Crypto Investors buy the new cryptocurrency to make a profit when it’s launched, and the value increases. ICO is similar to IPO (Initial Public Offering) used in the traditional financial system where shares are bought at the stock market and sold when the value increases. – In this context, the traditional financial system means the paper currency system. With ICO, tokens are distributed, and investors don’t have a share in the ownership right when they buy the new token.
Initial Coin Offering has helped many successful companies with the necessary funding required to start. In this model, a certain percentage of the newly issued coins are sold to individuals who are interested in supporting the project and some are sold to exchange (trading platform) for other existing cryptocurrencies like Bitcoin or Ethereum.
The first and famous ICOs that were conducted are the Mastercoin and Ethereum. In 2014, Ethereum held one of the biggest Initial Coin Offering and raised a sum of US$18 million at the early stage. Within 12 hours of its campaign, 3,700 BTC were realized. Increasingly in 2015, over US$34 billion were raised through crowdfunding worldwide.
Moreover, ICO is completed once it reached its soft cap. The soft cap means the predetermined minimal amount needed for the project to progress. And the hard cap is the maximum funds they will accept in the investment. Many of the ICO startups are the team of experts that have the intention to execute an application based on blockchain technology. However, the project idea would be detailed in a document called “Whitepaper” which the potential investors will read to determine whether the project idea is viable and will deliver quality.
This article will cover the different stages that are involved in Initial Coin Offering (ICO).
Seed Funding Round
When a new startup needs funding, the first funding round it gets is called “A seed round.” A seed funding round is usually used to inject initial capital into a new company to cover some vital expenses and get traction. Seed round aids a new startup to finance its first steps such as market research, product research, and some other essential needs. This fund round will help the company to determine what their product will look like and the target audience demographic.
The seed funding round is the first equality funding stage. A new cryptocurrency startup that wishes to raise capital using ICO has to provide some information such as the purpose of the project, project description, amount needed to raise for the project, types of digital currency accepted, percentage of the token the company will reserve, and the ICO campaign timeframe. However, crypto investors that are interested can ask questions to know more about the project before performing any transaction. If the amount needed for the project is not successfully raised, money will be returned to the owner and vise-versa.
We have three significant categories of funds. We have Venture Capitalist (VC) funds who cannot do token buys, Venture Capitalist (VC) funds who can do token buys, and crypto-funds. The VC funds that can’t do token buys wouldn’t be able to partake/buy tokens per their legal mandate of the fund. At times, these kinds of investors end up receiving tokens as a byproduct of an equity-based investment in a company.
However, for the other categories of the fund, it is likely for them not to buy the tokens in an ICO as the majority of these funds are interested in buying token in the pre-sale stage before the ICO. It’s because they’ll get a better discount on tokens available to later buyers. In ICO (Initial Coin Offering), the investors don’t receive equity in a company like that of IPO (Initial Public Offering), they only receive the proportion of the token they buy.
Initial Coin Offering are like IPO; thus, the difference is that in IPO equity are received and in ICO tokens are received.
Moreover, with IPO, equity holders have voting rights and stake in the company’s assets and liabilities, but in ICOs there is no voting rights or any equity. Investors only profit from an ICO when the value of the coin increases. ICOs are not obligated to be listed on the stock exchange for liquidity; they only list their coins on a reputable exchange like Bittrex, Poloniex, KuCoin, Huobi Pro Coinbase, Finance, etc. where one coin can be traded for another or fiat.
One thing you shouldn’t forget is that; write a whitepaper once you have gotten a concept. Writing a whitepaper depends on the nature of the project and concept. Some are full of formulas and schemas, others can be more technical, and some will describe the concept with diagrams and illustrations. The whitepaper should present the problem you are solving and vividly explain the solution you’re providing to convince investors about the value of your project.
In your whitepaper, ensure that your costing model is accurate and fundraising goal is realistic, for both the hard cap and soft cap. Also, your whitepaper should explain how the token will be valued, distributed and interact within the ecosystem. It should describe the concept of the roadmap as well as the team behind the project.
ICO Private Sales
ICO private sales are also known as Institutional round. It is the stage where tokens are sold to the early investors and not announced for public purchase. However, ICOs usually have rigorous requirements for participation if they announce their private sales. Also, they’re very picky when letting people into the private sales. Some ICOs even conduct interviews or do video calls to ensure that the investor is aligned with their goal for the ICO. Based on the amount of the contribution, discounts and bonuses are offered compared to the pre-sale of crowdsale.
ICO private sales are risky because of the inability to measure the success of the presale or crowdsale down the line. When buying tokens at the private sales stage, due to the volatility nature of cryptocurrency, Investors may lose his bonuses and even the discount compared to crowdsale. Besides, if the ICO does not hit the proposed soft cap during the presale and crowdsale, there may be no refund to the private sales buyer. – However, it may be a different thing in some other ICOs; therefore, it is good to be inquisitive as an investor. There is a higher minimum purchase amount at the private sale level; therefore, it is reasonable to consider the fact that the ICO’s product may not be near the minimum viable products at that time.
Investors at private sales can buy more tokens compared to presale or crowdsale investors. If the ICO’s project is viable, one of its benefits is a quick supply of tokens before any other investors at other levels, because in some popular ICOs, it is possible to hit the hard cap during presale or private sale
Pre ICO or Pre Sales
Pre ICO or Pre Sales is the stage in ICO crowdfunding where tokens are sold to investors before the official launch of the Crowdsale. Pre ICOs are announced on the website, social networks, and press releases are distributed on any other advertising platforms. Pre-sales give an opportunity to the middle-class investors who want to have a good discount and bonus rather than buying at the crowdsale or taking the high risks like investors in the private sale stage.
Investors at this stage have access to some discounts and bonuses depending on how early they invest and in proportion to the amount they contributed. However, some of the differences between the main crowdsale and pre-ICO is that; the fund-raising targets at the crowdsale level are lower, and the tokens are often cheaper than that of presale level.
A token might lack liquidity while awaiting trading or when cryptocurrency appreciate your tokens may be devalued and you would have to hold the coin. Also, one cannot determine the success of the project using the pre-sale analysis. However, apart from buying at a low price before the crowdsale, access to referral program and different bounty are part of the additional benefits to investors at this ICO stage depending on the organizers’ plans. Investors at the stage may make greater profit and token will be received even if the ICO hits the hard cap before the crowdsale. – Which means crowdsale will be canceled.
Upcoming ICOs & Whitelists
The Upcoming ICO is the level for the Initial coin offering token sale where the investors are unable to invest in the project. This stage is also known as the upcoming cryptocurrency or upcoming coin. Basically, this is the stage where ICOs are announced and promoted through ICO platforms, cryptocurrency forums, press releases distribution and more. – All these are done to build a community and get traction before the crowdsale of the upcoming cryptocurrency. This stage enables crypto investors to examine the viability of the project and plan ahead for the ICO that demands whitelist.
The whitelist is the process of registering ahead of crowdsale to show interesting in participation in an ICO. Whitelisting is the approach used by ICOs with a limited amount of tokens to offer. It is also a smart mechanism to eliminate fraud since there will be KYC (Know Your Customers) and only investors that passed will be allowed to participate in the crowdsale. With the whitelisting, email and contacts are gathered to update potential investors about the activities of the ICO.
Active (Ongoing ICOs)
The ongoing or active ICO is the stage where the main tokens are sold. This is the last level of crowdfunding that allows investors to participate. Once the active ICO stage has ended, the token will be distributed to investors. Thus, any other investors would don’t participate in the ICO but need the coin would have to wait until the coin hit exchanges.
It is prudent for you to research about a project before investing in it diligently. Once you’re ready to join the ongoing ICO, you have to convert your fiat currency to either Bitcoin (BTC) and Ethereum (ETH) depending on the ICO requirement. At this stage, the ICO company keep a close eye to prevent all possible fraud that might want to happen. Most companies will share the video on how to participate.
The ICO company’s obligation commences at this stage since the crowdsale is over and they owe thousands of people. This is the stage where the company determines the means of distributing the token to investors and the exchange to list the coin for trade. After the market, the ICO company will create a video tutorial on how to add the token to all kinds of wallets and distribute it to all their channels. However, there will be problems for those that drops an exchange wallet address and not through a private wallet they can control. - Thus, their contributions are gone. That is why ICO companies always warn not to send an exchange address. Smart wallets like MEW (MyEtherWallet) and MetaMask are the best bet to use.
After the market is an important time that the communication between the ICO company and the investors should be more effective, if the communication is bad, investors will believe that the ICO company has run away with their money. As an ICO company, let your contributors know every important step you took. Let them know the exchanges you proposed to list your token and let them know when the application is approved, and the coin is being traded. However, there is some peer-to-peer exchange like EtherDelta where anyone can offer any coins or token for sale without your consent, but you need to apply to some exchange to get listed.
In conclusion, it can be daunting to know the best ICO stage or sale to participate. However, as a contributor or investor, you should know risk and investment appetite to select the best ICO stage to participate to make a reasonable profit. Proper evaluation and planning will edge you against lost and enable you to get the best out of your investment in the ICO project. Research the team, listen to what people talk about them in forums like bitcointalk, Reddit, etc., know if the project is done or still in beta version, know the problem the project is solving and how it will solve it, know whether the company’s goal is SMART, and a lot more. Get their whitepaper and evaluate their plans.