Disclaimer: This article is not meant to be taken as investment or legal advice, but rather as a rough template to show the process behind an Initial Coin Offering and what the project’s stakeholders should consider when running one. Given this field is relatively new, best practices on what to do and what not do are still being defined. If you have suggestions or contributions, please comment below or share them with me in a direct message. I will update the post with changes as I collect them.
Without further ado, a step-by-step guide on launching an ICO:
1. Decide if an ICO is suitable for your business
ICO’s are not suitable for any business. It is not a tool to quickly raise money and bypass the long and costly process of registering a public offering with the regulators. While that used to be the case during the formative days of ICO’s, it is no longer true. Like everything else in the crypto world, the ICO ethos is taking shape and informal standards are being adopted by the industry. The main question every startup considering an ICO should ask itself is whether the digital token can be integrated into their business model in a meaningful way. If the only use for your coin is to trade on an exchange, it guarantees that the price will crash soon after the ICO takes place. Any token released during a campaign will come under tremendous speculation as soon as it hits the market. The only thing that can defend that is a strong demand for the token — a demand that can be produced by real utility. If a decentralized token can increase the value of your product, read on.
2. Create a product
This crucial step is often ignored by hustlers trying to raise capital as quickly as possible, but ignore it at your own risk. Building an actual product is far and beyond the most important part of an ICO. Spend your precious time building a solid, robust, secure, and scalable product on the blockchain, and only then tell us how it’s going to change the world. Perhaps you can get away with launching an MVP or beta and then conducting your token sale, but I think it’s safe to say that most startups will have to raise a little equity investment to get their business off the ground. It takes money to make money, and this is no exception. You must have a product, and your product must use your token.
3. Create a token
This might be the simplest part of the ICO process. Creating a token, at its core, means creating an asset that your business needs to survive. Tokens can represent any tradable good: digital coins, loyalty points, gold certificates, IOU’s, in-game items, etc. Tokens are similar to shares of a company sold to investors in an IPO transaction.
Before creating anything, decide how much you want to raise, how many blockchain or ethereum tokens you will issue, how many you will retain for the team and sell within the Pre-ICO (if you decide to sell some of the tokens before the main ICO), and decide in advance in what scenario you will issue additional tokens.
There are several platforms — such as Ethereum and Waves — that allow you to create your own tokens without having to create a blockchain from scratch. The sale of these tokens is controlled by something called a smart contract, which is a computer program that directly controls the transfer of digital assets between parties under certain conditions. While the creation of a smart contract is beyond the scope of this article, you can visit this page on Ethereum’s website to learn more.
4. Get legal opinion
Whenever you’re dealing with other people’s money, you want to be legally covered. The objective here is to ensure that your token is not seen as a security and make it clear that there is no effort to deceive. Where the ICO really begins is in the pre-sale and legal planning process. To avoid trouble with the SEC, you will need a formal legal opinion and a legal description of the token offering and what investors actually get for it. The three law firms that have established themselves in the ICO space are Cooley, Perkins Coie, and K&L Gates. All three are reputable law firms with extensive practices in cryptocurrency and blockchain. Cooley, in particular, has worked out a framework called SAFT (Simple Agreement for Future Tokens), which is an instrument and open-source legal framework for token sales. Keep in mind that the legal aspects of launching an ICO may vary from country to country. Do your own due diligence to comply with all relevant laws and regulations.
5. Write a whitepaper
A whitepaper is essentially a prospectus that clearly outlines the technical aspects of the product, the problems it intends to solve, how it is going to address them, a description of the team, and a description of the token generation and distribution strategy. It is at once a pitch deck, a business plan, a marketing plan, and a technical manual. So why are many terrible whitepapers being published, you might ask? I can tell you from personal experience that writing a whitepaper is NOT easy. These are seriously complex documents and far too few teams are investing into proper writers and marketers for this component. Hiring vetted external writers can force the founders to be more rigorous and thorough, while bad vendors will cover up gaps in thinking or product inefficiencies with jargon and fluff. An example of a good whitepaper is Edgeless.
***That said, neither the whitepaper nor any other business collateral holds more weight than a working proof of concept.
6. Create community and buzz
This is probably the second most important step in the ICO process. Your token sale will not get anywhere unless enough investors know about it. It is a sad but true fact that the majority of token sales are driven by initial hype. This hype, ideally, should be bolstered by a real community of investors that supports both you and your token, and will not sell at the first opportunity. There are several ICO marketing channels that I would suggest investing time and resources into:
- Forums: The most famous is Bitcointalk, where practically all the ICO projects are run. You will receive many reviews — positive and negative, but they will help you to improve your project.
- ICO calendars: Bloggers and journalists often create lists of “top ICO’s” (https://itsblockchain.com/top-5-upcoming-icos-to-invest-in/) on the basis of data from special ICO calendar sites like:
- Cyber Fund
- Reddit: In additional to creating your own reddit channel, there are several thematic sub-reddits worth engaging to find your target investors, including /r/ethtrader/(~ 85,000 subscribers), /r/icocrypto (~ 9,500 subscribers), /r/bancor/(~ 2,600 readers)
- Quora discussions: There are many discussions on Quora about different ICOs and specific cryptocurrencies in which you can actively participate and link back to your ICO landing page
- Slack & Telegram: Creating your own channel on Slack and Telegram is a must have in your communications strategy. Potential investors live on these channels and can communicate with the project’s founders, team members, and between one another. These channels must be monitored at all times and all questions and false accusations raised by users must be answered in a timely manner.
- LinkedIn professional groups: There are thousands of players and groups that discuss ICO’s, and here are just a few: one, two, three, four, five.
- Facebook groups: ICO’s are openly discussed in Facebook Groups like FASIS (ICO, Funding, Angels, Seeds, Investors, Startups).
- Media coverage: Quality PR in the right media outlets will help establish credibility, position your company as an innovator and thought leader, and convince people of your business model. With mainstream media becoming more and more cynical about ICO’s, having a great story outside of the ICO is critical. Make sure to communicate with your audience both before and throughout the campaign. Also, be mindful that pre-ICO media is quite different than post-ICO media, as the target demographic changes.
- Influencer marketing: The biggest barrier of ICO’s is creating trust — trust in whether the team behind it has the chops to execute on their idea. One of the best ways to establish trust is through tried and tested influencer marketing. Find the right crypto influencers for your business, incentivize them properly, and grow your audience exponentially.
- Paid media: Contextually and demographically targeted ads on Facebook, Twitter, Reddit, Google, and Yandex are a good way to amplify your content marketing efforts and reach short-term investors, long-term investors, as well as those precious end users that are actually interested in using your product.
7. Get your token out on exchanges
Once you’ve created your coin, whitepaper, and marketing strategy, you need to reach out to ICO exchanges to carry your coin. Exchanges enable people to buy and sell your token on the open market, so getting it accepted on the strongest and most established exchanges is critical. A list of exchanges can be found on Best Bitcoin Exchange, while most tokens will also be listed on CoinMarketCap, which is essentially a stock ticker of token sales. ICO’s that crash end up at the bottom of this large list or delisted entirely. The actual process of listing a coin on an exchange varies significantly by the site. Most exchanges like Bittrex and Poloniex strictly forbid tokens that could be considered a security. Submitting a request usually requires companies to present:
- coin name
- coin trading symbol
- description of project and coin
- coin logo
- launch date
- github link
- source code reviewed by trusted third party
- compliance fee (in some cases)
Another platform worth targeting is CoinList, a spinoff from AngelList. CoinList hosts token sales for digital asset companies, connects investors to your ICO, and handles a lot of the regulatory compliance. Getting listed here should drastically increases the chances of success for your ICO.
ICO’s are the new seed funding and 2018 will see more startups trying to shoehorn their way into the ICO framework. As this happens, cryprocurrencies will get further embedded in the financial world. While shakeouts and changes to the market are inevitable (especially when it comes to paying taxes), this is just the beginning of an incredibly powerful and egalitarian fundraising model for new ventures. Buyer and seller, beware.