By Xdite (Yi-Ting Cheng) Founder & CEO of OTCBTC Exchange
How do you design an ICO? (Several problems should be considered before ICO.)
ICO was a hot topic in 2017. The richening effect of ICO swept over the world last year. But the economic risk of token also swept over the world, forcing a few countries to carefully review the relevant laws, regulations, and policies.
In simple terms, the essence of ICO is:
- Public offerings instead of private offerings.
- Pre-selling the user rights of a product.
- Directly making a startup a listed company.
But ICO, a new way of financing, is changing the financing of a startup.
Based on the relevant businesses I was engaged in the past, now I often become the counselor of a project party. However, due to the extremely delicate details of this industry, I’m constantly answering beginners’ relevant questions.
So I decided to share a simple, basic guide and make some recommendations and steps for the design.
STEP 1: Find a legal “international law firm.”
ICO has been hot in 2017. Some regular projects are raising money, and some fraudulent ones are collecting money out of thin air. The market is hot, making everyone itch to try ICO.
“ICO is the fastest way of financing.” This is our established impression. Actually, it is right, but also wrong.
Of course, if you just want to run away with the money, it is the fastest way. But if you want to establish an enterprise and really achieve something, the design of token ICO/IEO/Give Away is a very good weapon when well used. But if you use it wrongly, it is also a suicide weapon.
So how should we design ICO? This is often the most concerning issue of the project party.
The first thing I recommend is to not talk to an Exchange or Fund, but to spend a sum of money to find a professional lawyer (an international law firm is the best) and have a nice talk.
ICO involves how the laws of many countries define how to do KYC, how to do AML, how a project party does a private sale, pre-sale, whitelist, and exchange cooperation. This is the first mistake of a beginner, one I often see. It is believed that ICO just needs to publish a white paper and get a smart contract to collect money.
In fact, it will cause some problems later. If you’re looking for a lawyer, I suggest you go to big international law firms directly. They have the experience of handling ICO. Because of different usage scenarios and objects of each ICO, only the people at this level have the ability and a large enough team to help you untangle status and framework.
STEP 2: Define your TOKEN holder group and the market size of TOKEN.
The second thing is to be sure which countries and which objects you want to finance from and how much money you want to raise.
The question most often asked by the “novice level” is about the cases of 1000-5000 ETH and below. To be honest, we don’t accept a case of 1000 ETH. The international standard level is a co-operative case of above 1000 ETH.
Why don’t we accept a case of 1000-5000 ETH and below to be listed on our exchange?
There are several reasons, as follows:
- 1000-5000 ETH is a small number in ICO. A rich person usually can fund it alone. If you only raise 1000 ETH, everyone knows this is a beginner’s project, and nobody will help you.
- Token Economy is an economic entity that can really play a role in the economy when it reaches a certain magnitude. If there are not enough people holding the token, the whole economic entity cannot support the whole cycle at all. (Briefly, it needs primary replacement and secondary replacement.)
A token must go through a lot of barriers before it can wield its economic ability, including private replacement, presale, ICO, and the circulation of the secondary market. A size of less than thousands of or even more than 10000 ETH is difficult to support this framework. And a size of more than 10000 ETH is equivalent to the size of A-B round of financing.
The cases of 20000-100000 ETH are most common. It is not good to be too small or too large. If too small, the scale can’t be enlarged; if too large, the entire funds are too much. Unless it is an international-level project, everyone will think it is hopeless for the price to be increased, and they will simply not invest in it.
3) Do you want global fundraising, or which groups do you want to raise money from, and from which country? It determines how to design your legal framework and how to promote your token. There are also potential legal problems.
STEP 3: Where is the circulation market of your TOKEN?
I use token throughout the article, because the most common usage scenario is the Utility Token. And a common mistake of a newbie is to regard token as Security. It is also a mistake that beginners will make when they don’t seek help from a lawyer to design the framework.
For a deeper understanding of this topic (COINS/token/security), you can read my previous speech: Token Summit 2017, and the livestreaming notes.
But in the end, a Token Holder only cares about two things:
- What is the value of your Utility Token?
- Where is it circulated?
Because a token that is unable to appear at the stock exchange is equal to a useless token. If your ICO is not powerful enough to find a stock exchange, then your project may have not started, and telegram will be overwhelmed by the angry token holders.
Many project parties only care about when they can get ETH if ICO ends, without considering, “What’s next?”. However, “What’s next?” is the most important thing in the entire Token economy.
A good token design can take your project to heaven, but a bad token design can make you utterly discredited immediately after the token is issued.
STEP 4: TOKEN Distribution
How should you distribute your token? How many groups should the token be distributed to, private equity firms, consultant whitelist, and ICO objects?
Each group has a different price and different lockup periods. Private equity firms can usually get the most discounts by pushing step by step. How to distribute token is a big problem. Because it involves your token price and whether the investors will undersell your token. That is why I have said ICO beginners tend to only consider how much ETH they get, without thinking “and then?”
During the period, your private equity firms and consultants will be related to the future trend of your token. Token is a very powerful weapon.
It is not the same as securities. Because token can rapidly change hands between bearers and be cashed out in a short time, it can attract a lot of believers to help you. But once you lose the public trust, the token price will plummet in free fall.
How much money to raise, from whom to raise money, how to put your token in the beginning, and how to do market value management are all great things to know.
STEP 5: How to do market value management
How does your project keep up with market value management? The token market is not yet an efficient market, and it is still a message set. If your project isn’t a money-spinning project, and you just want to do the project well, then you have to consider whether the online speed of your project can function, as well as whether the iteration speed and the cooperation speed can keep pace with the rising speed of the overall token market. (ETH has its own rate of increase, which cannot catch up with ETH = breakpoint.)
However, many startup teams are far from being able to make project PR management. It also involves the objects to which your token is issued at the beginning. Are they private equity firms, or those in the white list, or ordinary individual investors?
Because the token is a double-edged sword. Those people who praise you at first may be those who attack you at the end. I have also met a serious team whose token price couldn’t rise although they were doing well, because they didn’t understand market value and PR management at first. The whole telegram community was in a terrible mess.
It’s not going to happen in the startup circle.
In brief, “ICO can simply be understood as an IPO that compresses the time cycle and the cost of money, directly excludes the link of private placement, from angels straight to public offerings and to stock exchanges.” ICO is actually a more challenging scene than the angel round of financing of a startup.
Having experience in assisting dozens of projects’ ICO and their appearing in the stock exchanges, I will seriously suggest that an ordinary startup team not go through ICO at the beginning, but first raise the angel round of money to make products, and then raise A round and B round via ICO. Otherwise, the challenges in ICO will crush the whole project.
ICO sprang up dramatically in the world a year ago, and it first depended on a lot of reliable blockchain projects, raising a lot of money above quota. Then the richening effect followed, then all kinds ran wild, then started to debubble, and then began to develop a special token economy.
I have to say there is still a lot of chaos in ICO. But the blockchain economy has started to form a new environment and model. This is a dynamic economic ecology and also a very challenging one. If you want your project to go through ICO, these problems are the major issues that should be considered by the project party.