An Initial Coin Offering (ICO) appears to be an easy way to raise money for a crypto project. It could be. But it has a poor reputation in its execution and this might affect its success.
In 2018, Google banned advertising for Initial Coin Offerings because of a reigning lack of security for investors. Some ICOs turned out to be scams, while others appeared to be because of poor planning.
If your goal is to fund your crypto startup, an Initial Coin Offering should be one of your options. This guide will give a step-by-step layout of what an Initial Coin Offering is and how to plan one.
What is Initial Coin Offering?
Initial Coin Offering is a way to crowdfund a crypto startup. When a person has an idea for a crypto project, they create an outline of the product. This will include the product’s benefits and future valuation. After this, they pitch the project to potential investors for funding. Investors pitch in after a promise of an increase in the product’s value.
Instead of raising money from a venture capitalist, an ICO allows startups to sell tokens that may have future value. ICO projects raise money for the project’s development. ICOs are commonly used for blockchain and crypto projects. These tokens can be used for many things like buy products from the company, pay for services, or earn revenue from the market’s rise in price.
Most ICOs are based on Ethereum smart contracts. These are computer programs that run like a legal contract. ICOs are used to get funding to create a new crypto token. In one of the earliest ICOs of 2013, BCNext launched “NXT“. The financial services industry is NXT’s primary target market. Its initial tokens sold at $0.0000168 each. At the end of the ICO, they raised about $16,800 worth of bitcoin.
In 2014, Ethereum raised over $16 million in an Initial Coin Offering that lasted from June to August. It introduced its native token, Ether (ETH), by selling 50 million of them for $0.31 each.
In 2017, Blockchain technology brand, Electroneum, raised $39,930,000 of its proposed $40,000,000 in an Initial Coin Offering from 13 September 2017–22 October 2017. It launched its token ETN selling at 0.01 USD.
Recently, LOFI EQ raised $5,550,000 of its proposed $6,050,000 in an ICO from 26th August 2022–4th September 2022. The watch-to-earn social-entertainment platform introduced its LOFI token sold for 0.005 USD.
Each of these use cases has one thing in common: tokens. Each brand used it as a utility for investment.
Types of Initial Coin Offering
There are two main types of Initial Coin Offering – equity and utility tokens.
Equity tokens
Equity tokens are similar to the stocks that would be listed on a stock exchange. Equity tokens give the token holder a share of the company’s profits. This profit could be in the form of dividends or a company buyback. The dividends are paid in a currency like the company’s tokens. The company, in turn, has to pay out the dividends in a legal currency like the US Dollar. Equity tokens are risky, as the company would have to pay dividends. They are not a good option for startups that don’t have a revenue model.
Utility tokens
Utility tokens act like a coupon for a company’s product or service. It’s similar to a gift card that the company would redeem later. Utility tokens are not investments since the company wouldn’t have to pay the investor anything. The investor would redeem the value in the service itself. Investors can resell their utility tokens. This means that utility tokens have liquidity. Utility tokens are a good option for startups that provide a service.
How to Plan an Initial Coin Offering
Create a Token
This should be clear at this point. Investors will exchange the token for fiat currency. This is called a Utility token. It is given to investors in exchange for money that they can use to access the services on the platform. They have no monetary value but you get a discount for using them. Here are 5 tokens created via an ICO and their floor price
- Chirpley created the CHIRP token. 1 CHIRP was 0.021 USD
- Skeb Coin created the SKEB token. 1 SKEB was 0.0032 USD
- Goons of Balatroon created the GOB token. 1 GOB was 0.05 USD
- DEFY created the DEFY token. 1 DEFY was 0.024 USD
- EdenLoop created the ELT token. 1 ELT was 0.17 USD
Here is a full guide on crypto tokens, their types, and how you can use them here.
Prepare a White Paper
What is an Initial Coin Offering without a White Paper? A possible Scam. Or potential investors will see it as such. A white paper is a report backed up by research that presents a description of the project.
The white paper outlines how to use the tech and how it will benefit the user. Here are 4 key items you need in your white paper, collated from 4 successful Initial Coin Offerings.
Features of a White Paper in an Initial Coin Offering
- Legal Disclaimer:
SweatCoin closed a $15 million Initial Coin Offering. Before this feat, they produced a 23-paged White Paper.
On page 3 of the document, there was a legal disclaimer that highlights the management’s commitment to breaking new ground in blockchain technologies.
What stood out in this section was the notice that the Initial Coin Offering does not constitute an offer or an invitation to make any investment or to subscribe to any token, asset, security, or other instruments of any kind.
- Mission of the product:
The best way to win an investor is to let them into the mind of the founder. This section tells them how their money will be used.
On page 2 of a White Paper by SubQuery, the document detailing the purpose of the ICO is in the “Problem” and “Solutions” sections. These showed the core problems in blockchain data as well as decentralized data and how SubQuery will tackle these problems through the ICO.
- About the brand:
Every Initial Coin Offering has a description of the brand. This is always in clear and simple terms that communicate the brand’s functions in the blockchain market.
This can include previous partnerships or projects that lend credibility to the brand. Also, it might be a good place to show how lively your platform will be to partners.
In this witty White Paper introduction message by Cantina Royale, the tactical arcade shooter brand communicate the mood of the brand in mind with clear but informal terms that tell you they are about business but will want their users to have fun along the way.
The mood especially for the gaming brand in the metaverse will make you know they are there to serve users.
- Feature of the Token and Valuation:
This section should have the name of the Token, its price, how many are in stock, and its proposed future valuation. Use a diagram to represent each stat and let the valuation be super clear. It does not do you any good if your facts are not accurate or they are not simple enough to grasp. And since the pitch is not face-to-face, communication is already hampered. Try to make it simpler with clarity.
If it is a Non Fungible Token (NFT), give the number in your collection and the background of the NFT. In the $600,000 Initial Coin Offering by Cripco, the white paper gave a clear description of the IP3 token and how the user will use it.
Indicate the Token type:
About nine different kinds of cryptocurrencies exist. They include asset-backed tokens, stablecoins, DeFi tokens, NFTs, exchange, payment, and security features. These classifications are based on a variety of factors, including the design or code, the use or use case, and the operation of the cryptocurrency. Utility Tokens are the most common types in Initial Coin Offering since they provide access to platform services where they reside
Indicate Fundraising Goal:
A fundraising goal in an ICO gives potential investors how much you need and how much time they have left to invest in the product. Without a fundraising goal, the ICO might be seen as a limitless money pot with no use. It also shows a good planning mindset when a goal is clearly outlined.
Mode of payment acceptable:
The mode of payment in an initial coin offering provides investors with the means of payment you accept when they want to purchase the token. The general mode of payment for cryptocurrencies is via fiat currency. Fiat currencies include the U.S. dollar, the British pound, the Indian rupee, and the euro.
Structure of management and team:
Let it be visible that you have a working team filled with real people with real lives who are willing to answer questions about the project. This ensures transparency. You can outline the use of a section with the graphics image showing the structure of the brand; from the founder(s), brand manager, and other key individuals at the brand.
Conclusion
This article aims to educate you on what an ICO is and how to plan one. You should know that ICOs are not without risks. It’s the Wild West out there, and ICOs have a poor reputation for being scams. Take the necessary steps to protect yourself from scams and make sure that you educate yourself on ICOs.
An Initial Coin Offering might not be the best way to go if you want to raise money for a crypto project. There are other ways that are easier and more legitimate. For example, you could host a token sale on a centralized platform like Kickstarter. You could also create a token that powers your decentralized application.
