Initial Coin Offering
Initial Coin Offering is a way for new cryptocurrency projects to raise the necessary funds. It is therefore a kind of crowdinvesting for crypto startups. The term is derived from the Initial Public Offering, also called Börsengang in German-speaking countries. But unlike IPOs, Initial Coin Offering is less regulated and not always clearly defined legally.
In some countries, such as China and South Korea, initial coin offerings have even been banned outright. Facebook also seems to be cautious in its approach to ICO. As Bloomberg reported in an article at the end of January 2018, Facebook has blocked ads and banners for ICO and cryptocurrencies of any kind for the time being. According to Facebook, the reason for this action was that many of these banner ads turned out to be misleading or fraudulent.
How does an ICO work?
- Goals: What problem does the project want to address? What solutions does it offer?
- The team: who are the people behind the project? Is there a designated headquarters? How experienced is the team?
- Roadmap: What has the company accomplished so far and is there a plan for the future?
- In what timeframe should the ICO be held?
- How many coins will be generated in total?
- At what price will the coins be offered?
- What amount is to be raised via the ICO and what will the money be used for?
- How many coins will be retained by the team?
Ethereum is used by many startups as the preferred platform for Initial Coin Offering. The reasons for this are, on the one hand, the possibilities of smart contracts. With them, the rules and conditions for the ICO can be conveniently set. For all involved, this means more security and a relationship of trust. Another point in favor of Ethereum is the possibility to create your own token via the platform.
During the ICO campaign, investors buy these newly generated tokens. Fiat currencies can sometimes be used for this purpose. In most cases, the new coins are exchanged for virtual currency such as BTC or ETH. These purchased Coins are thus comparable to shares in a company that are sold to investors as part of an IPO.
If the ICO does not reach the target set in advance within the time, then the money is returned to the investors and the Initial Coin Offering can be considered unsuccessful. If the campaign was successful, the funds raised are either used to start working on the new system or to complete the platform accordingly.
There are different strategies for the Initial Coin Offering. Investors who invest early often receive preferences and pay a lower price per coin. However, if demand increases, this can affect the price accordingly. Other campaigns forgo price fluctuations and set a fixed price that is maintained until the end of the offering period.
The motivation for investors to participate in ICO is to acquire the coins at a low price at the beginning. If the startup proves successful after the Initial Coin Offering is completed, the Coins will also increase in value. For the investor, as the examples in the next section show, this can mean a significant profit.
Positive and negative ICO examples from the past
There have been numerous Initial Coin Offering campaigns in the past. Many cryptocurrencies would probably not even exist today without these campaigns. The first ICOs were held as early as 2013. Some of the most famous ones will be presented here.
Ethereum is not only a popular platform for Initial Coin Offering. The platform has also held an ICO itself. With a pre-sale of around 60 million ETH, the Ethereum Foundation raised around 31,500 bitcoin. This made it one of the largest crowdinvestments ever and one of the most successful ICO campaigns.
Mastercoin, now known as Omni Layer, was one of the first to hold an Initial Coin Offering. In 2012, Mastercoin creator Willet, published an influential whitepaper suggesting that the blockchain could serve as a foundation for other applications. To fund the development of his project, Willet promised 100 Mastercoins to anyone who sent him a Bitcoin in August 2013. He posted this offer on the Bitcointalk forum. In the end, Willet received about 5,000 Bitcoins, worth about US$500,000 at the time. Today, that equates to more than US$50 million.
The NXT ICO started on September 28, 2013 and lasted until November 18, 2013, raising a total of 21 Bitcoins worth about US$14,000. The campaign was held in an unofficial manner via an anonymous Bitcoin Talk forum account. However, the Genesis block showed that only 73 people had participated in the ICO, which ultimately led to a poor distribution of coins.
Swiscoin’s ICO is probably one of the most well-known negative examples of the past year. According to a report by the Ukrainian Prosecutor General’s Office, a group of Ukrainian nationals and an Indian national had planned this scam. They promised potential investors a cryptocurrency called Swiscoin. It was supposed to enable instant transactions worldwide. However, in reality, the collected funds were divided between the criminals and spent for their own purposes. The scammers were able to collect about US$500,000.
ICO summed up
Initial Coin Offering (ICO) can be beneficial for all parties involved. Smaller projects and startups in particular benefit from the simple and direct method of accessing funding, allowing them to bypass complicated procedures via banks and venture capitalists. These small and medium-sized crypto startups are also the ones that often have the greatest growth potential. For investors, this can mean a tempting profit margin.
Nevertheless, before any investment via Initial Coin Offering (ICO), it should be checked exactly what is behind it. Important information is provided by the respective company website and whitepaper. Websites such as coinmarketcap or ICO-List can provide further clues. There, information on ICOs, market capitalization, price development and other important backgrounds are presented impartially and factually. Security Token Offering (STO) offers perhaps a better alternative.
Execute an ICO
ICO is a new method of investing in startups and existing companies. As a form of financing, it is used by founders to attract investors. Here, cryptocurrencies are primarily used in the financing of the ICO, which especially supports startups and young companies in the early stages of their business. The term ICO originated in reference to the IPO (Initial Public Offering), which describes an initial public offering. Unlike the securities issue, however, the legal hurdles (publication requirement) are lower in the ICO. In the investment, participants put in a certain amount to profit from the crypto project in case of success. If the project proves successful, investors can multiply the invested capital. Investors are initially promoters and supporters of the project, who only make profits in the event of a positive development.
Basically, ICOs find application in early financing and development phases of a company or project. As a founder, you first present a whitepaper (description of the project) before conducting an ICO. In this whitepaper, explain the business model or venture and its technical specifications. The whitepaper serves to convince potential investors of your project.
In a subsequent ICO plan, you develop a timeline (roadmap) for issuing tokens to investors. The goal here is to reach a predefined budget. In the further course of the financing, additional tokens are acquired based on specific cryptocurrencies and/or fiat money (official currencies such as euros, US dollars or Swiss francs).
The tokens can now be distributed depending on the respective investment amounts of the investors. As the amount of capital invested increases, so does the number of tokens investors receive. Issuing tokens and investing in a project together contributes to the further development of the project and strengthens the sense of togetherness among investors. Once the traded price exceeds the initial purchase price for the tokens from the ICO, profits are realized.
Selecting the right token
As a founder, you are given free choice in selecting the token when planning your own ICO. Different types of tokens exist, each with its own characteristics.
The tokens are associated with different types of rights. In an equity token, investors receive an actual stake in the company. This form of ICO is most closely related to an IPO in the sense of an initial public offering.
Platform and technology
Another important decision concerns the choice of platform or blockchain on which you create the ICO. Smart contracts or decentralized apps can be developed based on various blockchains. In the meantime, some projects have emerged that differ significantly from each other. The differences relate to transaction speed, cost per transaction and data security.
A large proportion of current ICOs are based on the Ethereum platform. This blockchain represents one of the most well-known technologies for launching the Initial Coin Offering. It involves comparatively low technical hurdles to create an ERC-20 token. However, the Ethereum platform is not free from some weaknesses. Among them is the longer transaction time. This is noticeable due to the scaling problems of the blockchain. Some smart contracts rely on particularly fast settlement, which is why this transaction duration can become a problem. In this context, however, the more recent sharding technology should be mentioned, which should help to solve these problems. This technology is equally expected to solve another problem of the Ethereum platform: the transaction costs, which have so far made the settlement of micro amounts via Ethereum unattractive.
Alternatives to Ethereum can be more efficient in terms of transaction duration and cost, but have drawbacks in other areas. Few alternative blockchains have been established in the market as a platform for ICOs or designed to do so so far. Therefore, handling ICOs or integrating them into the existing project may involve significant additional effort. As a mature platform, Ethereum enables the creation of more elaborate smart contracts. The programming is versatile and allows numerous customizations. Stellar or Waves are providers that only allow limited customizations. This is a limitation in terms of possibilities in the creation of smart contracts, but an advantage for security.
A key component of any Initial Coin Offering is the creation of a whitepaper in which you explain the plan in detail. Among other things, this should describe the technology to be used and the team behind the concept. This document also contains information on the technical system architecture and interaction with users. It also contains current market data and estimates for future growth. The requirements for issuing and using the tokens are also described in detail. The whitepaper is rounded off with details and lists of the team members, consultants and partners. Whitepapers are aimed at both potential investors with specialist knowledge and those without any particular prior knowledge.
Of particular importance in the whitepaper is an explanation of future development plans. A precise work plan for a period of at least twelve months should be available, also taking into account a beta launch. Ideally, some of the tasks in this roadmap will already have been completed.
Likewise, you should educate potential prospects and investors about the planned distribution of tokens. Investors have an interest in knowing which part of the invested sum will remain in the company and which will flow to the investors.
Get legal advice
Considering the variety of different token types and legal hurdles associated with them, it is advisable to seek advice from a lawyer specialized in the field of Crypto, ICO, STO if you want to conduct your own ICO in Germany. Some law firms now offer specialized legal advice in Germany in connection with ICOs. These law firms usually represent an important partner and contact for founders and start-ups when it comes to legally compliant planning and execution of an ICO. If you are planning this form of financing, you should inform yourself in detail about the legal situation in connection with ICOs. If necessary, it may be legally advantageous to move abroad with the company. When choosing a legal advisor, you should make sure that he or she has experience and references in the field of ICOs.
In consultation with the lawyer, founders should formulate the legal terms of the project. An ICO includes a large number of regulations and requirements, for example, about what type of investor (private investor / institutional investor) may participate in the ICO and to what extent.
Creating the team and the board
When you create your ICO, its success essentially depends on a competent team. When it comes to a startup’s ICO, diversity on the team is an advantage. The team should not only consist of entrepreneurs, but also include developers. This will allow you to convey to potential investors that you are capable of executing your own ICO. In this regard, you should rely on trustworthy people who supported your project. The trustworthiness and reputation of your team members is essential to convince investors in their investment decisions. Previous achievements and already acquired reputations of the team members are an advantage.
If your team does not have suitable people for key tasks, these should be delegated to external service providers. The areas in which experts are irreplaceable include blockchain technology and legal advice, as well as business development and marketing. Aspects of technical development as well as finance should also be considered in the team.
The Advisory Board
The Advisory Board represents the advisors of the team. This acts as an independent body when you conduct an ICO. The Advisory Board also makes strategic decisions about the design and future of the ICO. The staffing of the Advisory Board can have high significance for the investment decisions of investors. In the Advisory Board, just as in the rest of the team, reputation or experience in dealing with ICOs also count for a decisive role. A well-known board member can therefore significantly increase the interest of potential investors.
When planning your ICO, the founding team as well as the advisory board should complement each other. Complementary roles contribute to comprehensive project management.
Hiring a service provider
Issuing tokens as part of an ICO is associated with technical hurdles as well as legal ones. In principle, it is possible for you as the founder to handle the issuance of the digital units yourself when you create an ICO. Blockchains like Ethereum’s are characterized by the fact that companies can generate their own coins on their basis. De facto, most ICOs are based on ERC20 tokens.
Creating the prototype
An ICO-funded project can be communicated more convincingly if you can already present your potential customers and investors with a prototype that proves the project will work. Considering the increasing competition and the multitude of ICO-based startups, a mere whitepaper alone is usually not enough. No matter what the product or service is, a working prototype will help build trust in your project. It is important to have a clearly identifiable line of the project here, and subsequent investors for the ICO will be more likely to choose to look into your concept in more detail as a result.
Design of the website
Of similar importance as the whitepaper is the design of the website to convince potential investors. If the goal is to create an ICO, investors want to be able to access all relevant information at a glance. The facts and figures should be informative and easy to understand. Investment decisions can be influenced at this point via certain incentive systems. The website is another way to convey a trustworthy image of your start-up or project.
A clearly structured website strengthens both image and brand. The focus in the design should be on a user-friendly design. There is a high level of competition among start-ups for the usability of web presences. Therefore, certain design elements are mandatory. These include interactive elements and high-resolution graphics. Responsive web design, which adapts the output of the website to the device used, is standard.
Marketing and acquisition of customer data
Another goal of the web presence is lead generation. This means the acquisition of customer or investor data. They obtain this data by providing well thought-out communication and interaction options. These include forms in which interested parties can enter their data or ask questions. This data can be used later in the deal for marketing campaigns, for example. This further contributes to making your project better known.
Even a well thought-out concept will only be successful if it is known to a sufficient number of interested parties. Therefore, a mature marketing plan and an overarching strategy need to be developed when creating your ICO.
The information published on our site is all written and reviewed by experts with the utmost care. However, we cannot guarantee its accuracy, as laws and regulations are subject to constant change. Therefore, always consult a subject matter expert in a specific case – we will be happy to put you in touch.