Ever since Mastercoin launched the first one in 2013, ICOs (short for initial coin offerings) have grown into one of the most often discussed topics among crypto enthusiasts. The growth in discussion certainly had something to do with the overall rise in the popularity this type of financing experienced throughout the time, peaking during the late 2017. This was a period when new ICO’s popped up almost daily, with new projects looking to tokenize various aspects of economy and life.
Naturally, with anything that grows in popularity relatively quickly, the quality of the final product begins to become questionable. With ICO’s, worrying practices like pump and dump schemes and fraud found their way into the space during the period when crypto enthusiasm was at its highest. Projects with no transparency, projects with abhorrent MLM-like presentation and copy-pasted whitepapers, projects with no concrete products/guidelines for the future, collected millions of dollars only because investors were willing to throw money at anything that embraced the moniker of an ICO. This was a point in time when you could have thrown a dart at a list of upcoming ICO’s, invest into whatever you hit, and still be quite comfortable that your investment will end up being profitable.
Eventually the crypto and the ICO bubbles burst; as Bitcoin started devaluating, shady projects began revealing themselves, either abandoning the idea of holding an ICO or straight up exit scamming their investors. This prompted government agencies in the biggest world’s economies to limit the exposure of local investors to this investment method, in the process leaving many good projects without funding as well. As a result of all of this, the space started seeing less and less “chaff” appear over time.
While we still get projects waving the red flags left and right, these occurrences are quite rare. The projects of today have seemingly learned some lessons from their predecessors, knowing what works and what doesn’t when kicking off an ICO. These projects look to implement proven, quality practices that have in the past shown they can lead to success. We decided to identify some of these practices and list them out in this article.
Probably the best thing that a project can do to ensure its long term future is to stay transparent from the get-go. There are many unknown factors included in any form of business activity; every participant in such activities is constantly looking to minimize the things he doesn’t know to ensure that nothing can sneak up on him and crash his investment. This applies to the ICO world as well.
When looking for ICO’s to put his capital in them, the investor will look into the projects to determine how transparent they are. Some things he’ll pay attention to include:
- If real names/faces stand behind the project
- Project’s/team’s social media presence and how responsive they are to questions/praise/criticism
- What the project’s vision for the future is and how they intend to spend the collected capital (financial governance)
- Tokenomics, ICO price, token distribution and utility
- Financial statements and information regarding the material wellbeing of the company behind the ICO
- If the project is aware of its strengths/weaknesses
- Potential negative/positive experiences that others previously had with the project/team
Being transparent with your potential investors about your intentions goes a long way. Having all abovementioned information compiled in one place can help tremendously; otherwise some investors might give up due to not being able to inform themselves. This is why legitimate projects most of the time release whitepapers prior to conducting ICO’s. Transparency can help set up a base of faithful users and ensure that the ICO and the project behind it are successful in the long run.
Emulate traditional business practices
The old saying goes “keep it simple stupid”; we can paraphrase it by replacing “simple” with “traditional”. Even though ICO’s are a relatively new field of investing and business, that doesn’t mean things which worked before won’t work here.
You want your core team to stay on the project for a while; therefore it’s a good idea to have them paid. An ICO can help you collect the funds required for your team’s paycheck, but it is recommended to be transparent with the investors regarding the money that will go for this purpose.
Also, make sure that your project is regulatory compliant. The legal framework for cryptocurrencies is still in the making but there are several things you can do to make your project abide by law. Know if your token is a security or not; Howey Test is one popular method of answering this question. If the token is in fact a security, apply for the required licensing. This is usually a lengthy process but it will save you from much bigger headaches later on. Require your investors to perform Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) checks. This practice is standard with stock market investing and will help the project stay legal in the crypto world as well. At the end of the day, pay a lawyer who is familiar with the space and crypto related regulations as such an individual can help your project take off in a legal, regulatory compliant way.
Have a real project/product
This practice is one that many projects neglect as they focus on other areas like networking, marketing, or exit scamming their investors. Your project’s business model and legal status play a significant role in launching a decentralized blockchain; some investors prefer decentralized models like foundations which aren’t owned or controlled by a single individual. Others might be looking for a more centralized entity like a typical company whose blockchain won’t be as open-source or decentralized as the one from the example before.
Naturally, you product will play a massive role in adopting good practices as well. The token either needs to have excellent utility/real world application or should provide solid returns on investment. It should be built on top of a blockchain, either a native one or one like Ethereum. It is important to detail a timeline, a roadmap, which will inform potential investors when and how you intend to achieve various milestones regarding your product. Key services/functionalities, targeted investors and potential investing restrictions, plans to hold private sales are among the generally accepted practices as well.
An ICO is basically a crowdfunded effort and crowdfunding usually requires people to know about the project. If people aren’t aware of your ICO, they won’t invest in it. Talking about the project creates a buzz which correlates with previously mentioned practices. Investors who hear a lot of positive talk about a project will look into it; investors who notice that project’s buzz is dropping off might get cold feet.
Having a base of investors who got in on the ground floor and are fervently spreading positive word about the project can give out an impression that the project is, in fact, the real deal. This can motivate people “outside of the pack” to join in, even without doing deeper research on the project. Project’s social media and networking efforts come into play here, since every post/conversation about the project has the potential to roll the ball more forward and maintain/increase the buzz.
The one negative side here is that this practice is often associated with scam projects; since they have nothing else to show, these projects focus all of their efforts into building aggressive social media campaigns that will fool people to invest. Still, if your project has something concrete to offer, you shouldn’t be worried.
Be realistic with the funds
With ICO’s, it’s rather easy to overshoot the mark and set unrealistic goals for the fundraising. Funding goal should reflect what your project realistically needs to get off the ground into a working state. Asking for too much can make your company look greedy; asking for too little can leave you short on funding. Projects have had to organize additional post-ICO token offerings in the past to gain additional funding.
The timeline of the ICO is of equal importance (if not greater) as the mentioned project roadmap. A short ICO can leave you hanging without enough funds to complete your vision; a long ICO can delay your project’s development, leading to investors being unhappy or competitors moving in to take advantage of your idea.
There are many more positive practices that can be identified with successful ICO projects. Emphasizing security by utilizing multisig wallets for investors, locking the collected funds in an independent escrow from which the money will be released according to milestones delivery and technological advances, smart contract security, accounting and taxes are just some of the areas that can determine if the project lives or dies. An extensive list of these practices has been collected and presented here and here, so check those sources out if you want to know more.
Overall, the best practices utilized with ICO’s (or as they are called nowadays, token generating events) can be seen with any other form of crowdfunding and investing. ICO’s didn’t re-invent hot water, they’ve just opened a new spa. Each project needs to realize that an ICO is a risky, time/effort/money consuming endeavor; a lot of things can go wrong. Therefore an ICO can sometimes do more harm than good. Ultimately if you determine that an ICO is a suitable for of financing for your project, you want to make sure that your business proposition is seen, understood, and supported by enough investors to make the effort worthwhile. Hopefully, some of the guidelines listed above will help you along the way.