A 5 minute guide to ICO prerequisites
With $4B fundraised through ICOs, it looks incredibly tempting for a company to ask themselves, the question of whether an Initial Coin Offering will be an easy way to get money. The reality is that an ICO is a much more difficult process, and only make sense if your company fits a very specific set of criteria.
If you are thinking about going through an ICO, you are definitely not alone. This is one of the most common questions we get as Blockchain consultants. The reality is that this question is based on a huge set of other assumptions and circumstances, and we thought it was important to discuss some of them.
Before even considering an ICO, we have to consider the reasoning. If you are thinking about doing an ICO because your company cannot fundraise via classical means, it will be very unlikely for you to have a successful ICO. There are many costs leading up to the event that cannot be avoided.
In terms of technology, the most important question is whether or not you should even use Blockchain technology. For that reason we will start with the question, should you even be using the Blockchain?
The Blockchain Test
The first condition a company should meet is that it is crucial for any ICO to satisfy the conditions of the utilization of Blockchain. Namely, the question:
“Is a shared, immutable, and decentralized database the best way to run your business model?”
If the answer of that question is no, then you can stop right there with the experiment. This is the one and most important question regarding not only ICOs, but the use of Blockchain technologies in general.
Even if you decide to create a private Blockchain, and only enable certain individuals to write or collaborate in it, you have to accept that whatever consensus protocol you use, will require a shared and immutable database at its center, and the business will be relying on this shared information database to provide a good or service.
Hybrid and Private Blockchains
Once you have decided that a Blockchain-based consensus protocol is crucial to your value proposition, the next question is to decide what type of Blockchain satisfies it.
The hybrid Blockchain model is a combination between having some decentralized database, and also a private one. This is typical for companies that have a username and password. The power of a centralized database enables users to recover it in case they lose it. Something that you wouldn’t be able to do with a wallet.
Private Blockchains are those that are owned by a corporation (and/or partners) and is not necessarily displayed publicly. This obviously has legitimacy and centralization concerns. This type of Blockchains is more typically used to create a trustless system between business partners.
Should we ICO?
Your own token
Even if using blockchain is necessary, and having using a token is central to your product’s offering, it still does not mean that you should ICO, or even create your own token. There are hundreds of options already out there, and using an already-existing token will remove a lot of headaches from multiple sides including:
- Speed of development
- Having to go through an ICO
- Potentially legal
- Chicken and Egg problems
- Potentially exchangeable
But of course you lose:
- Optimization for your use
- Sometimes trust
Based on your resources and ability, it might be a good option to start with someone else’s token to test an MVP and then develop your own token after you have understood the problems and solutions that can be offered.
You should consider that companies that have a necessity to reliably produce and share data have a stronger argument for an ICO than those that do not. More importantly, companies that rely on network effects to grow and share data are going to develop a mature Blockchain usage faster than those that do not have network effects.
The process of going through an ICO is long, complex, and much larger than the scope of this article. However, the most important aspect of it, is that you have to strategize and prepare the 5 following categories in your marketing documentation:
- Business strategy and relevant information
- Technical details and importance
- Legal procedures and best practices
- Taxation implications and best practices
- Marketing, especially with legal considerations
This means that a series of professionals should be involved in your ICO and the jurisdictions you want to target. For more information you can check our website.
Any type of fundraise will require a lot of professional advisory in different parts of it. ICOs are no different, and in fact, probably require more advice than any other early stage funding method. For this reason you should always talk to professionals and discuss with them your intentions and arrive to a solution.
While the industry looks glamorous and simple on the outside, the reality is that even when your company matches the perfect description of an ICO (whatever that may be), you still have to do a serious amount of work and preparation in order to actually launch this type of campaign.
And most importantly, there is currently no consensus of exactly what type of ICOs are allowed in which jurisdictions. The current field is full of questions regarding legal, taxation, technology, and a lot of very legitimate concerns about the practical uses of Blockchain technologies and its problems.
That said, the industry is poised to be one of the most important communication and financial innovations in the last decade, and is demonstrating that giving the power back to the people is an incredibly strong force for both good and bad.
Lastly, remember that the question of should we ICO is very different from can we ICO. Just because you can do something doesn’t mean that you should.
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