Each year a rapidly evolving digital economy generates more cryptocurrencies and tools, associated with them. How to make everything clear? How to seize the opportunities? How to invest in ICO and how to enter the cryptocurrency exchange? Ambisafe Inc. together with the rating agency ICORating provide a complete guide to ICO.
What is ICO?
ICO is an analogue of IPO in cryptocurrency economy. If IPO is known to us as the initial public offering of shares on the stock exchange in the traditional economy, ICO (Initial Coin Offering) is the process of release of the company’s own tokens (an analogue of shares on the traditional financial market with a number of unique properties) and their accommodation on the cryptocurrency exchange.
Due to innovations, provided by the blockchain technology, the cost of this process with the use of cryptocurrency exchanges is ten times cheaper than the cost of the traditional IPO on the financial exchanges. If the typical IPO price for the European stock exchange is within $1-$2mm range, the cost of an ICO process with access to the cryptocurrency exchange ranges within $100-$200k. At the same time, the result is the same in both cases (the size of possibly attracted investment is many times greater than the cost of the process of release), that is, spending about $100,000, a company may raise up to $50,000,000 of investments.
Here are some examples of successful ICO for the fall of 2016:
- Iconomi (investments, finance - Open Fund Management Platform) - ICO was held 25/08/2016 – 29/09/2016 and brought 17,274 BTC, which is equivalent to approximately $12,000,000;
- FirstBlood (infrastructure for gamers - A Decentralized eSports Platform Based on Smart Contracts) - ICO started on 25/09/2016 11:55:33 PM and lasted for 8 minutes 48 seconds bringing 465,313 ETH, which is equivalent to approximately $5,500,000;
- Golem (Decentralized worldwide supercomputer Golem can be used by anyone to sell the computer's computing time over the internet.) - ICO started on 11/09/2016 and was completed on the same day, as it attracted the necessary amount of investments and fulfilled the plan in one evening. The project brought 820,002 ETH, which is equivalent to approximately $8,000,000.
Usually, an already known, stable company with a financial history enters the financial exchange. ICO is mainly used for crowdfunding projects, i.e., for companies that just start their own history. New entrants cannot predict the reaction of the market to the full. Therefore, the first step to start ICO is a pre-announcement of the project.
Stage 1. Pre-announcement
Pre-announcement is the announcement of the future project in the communities of cryptocurrency investors, such as Bitcoin Talk, Reddit and others. The founders of the project write an executive summary - a small presentation to investors, in which they explain the essence and purpose of the ICO project. After the executive summary, the company receives the first feedback, which can be analyzed to see whether the project could interest investors or not. The pre-announcement may cause many questions about the business model of the project and unperceived risks. Taking into account all incoming comments, the business model receives proper adjustments. This feedback process with subsequent adjustments is repeated for several cycles, as long as there is no agreement between the founders and prospective investors. The first stage ends with making the final business model of the project and writing the detailed offer.
Stage 2. Offer
Offer is a proposal for conclusion of the transaction, which sets out the essential terms of a contract addressed to a particular person, a limited or unlimited number of persons. The offer is made on behalf of a listed company, which enters ICO. The offer covers all the nuances of the project, specifies the desired amount of investments, project deadlines. The offer specifies what kind of financial instrument is to be sold on the stock exchange. As a rule, these are tokens.
Tokens in blockchain are the cryptocurrency, which is the equivalent to a financial instrument that is represented on the cryptocurrency exchange. 1 token can be equal, for example, to $1.00 of a debt, 1 share of the company, 10 shares of the company, the right to vote anywhere else, and so on. Now, there are no established standards on what will be the token in a particular project, so it is specified individually in each offer. After selecting a financial instrument, the offer covers all the rights possessed by the token. For example, ETH token, released during ICO Ethereum was of extremely speculative nature, and DGD token in addition to being backed by foreign exchange reserves, also gives the holder the right to put forward proposals for the management of the company to the other shareholders.
Today, regulators around the world just begin to understand what is blockchain, so there are just a few companies that have released their traditional counterparts to blockchain shares. As a rule, tokens provide for a certain period, after which the company begins to pay its obligations to investors (e.g., to pay dividends). This period is also indicated in the offer.
After signing the offer, the start date of the sale of tokens is announced, and the issuing company carries out an active PR-campaign.
Stage 3. PR-campaign
Since ICO is often carried out for young and little-known companies, an important role in the success of the project belongs to a competent PR-strategy. To this end, the specialized agencies are involved and presentations are organized at various conferences, and so on.
On the financial market before starting IPO, a similar campaign is held as well, called Road Show – a practical training element of the issuer in releasing its securities. If in the financial economy Road Show is a series of meetings with prospective major investors and analysts in key cities around the world, in case of ICO the PR-campaign lasts on an average for one month and is focused not on institutionalized investors (banks, funds, etc.), but on a broad segment of smaller investors.
The target audience in this case - the participants of crowdfunding programs, so-called “business angels”. Such investors are more willing to support projects, where they can apply their own experience. Personal involvement and expertise are the fundamental difference between business angels from other private investors. Among the active business angels there are many entrepreneurs, attracting external funding in their own projects. Investments received from this group, are known as “angels’ investments”.
After the end of the PR-campaign the process of selling and buying tokens begins. On the date of ICO start, the company provides investors a way to buy the tokens alleged by the offer. As a rule, there are two such methods.
Stage 4. Start of sales in the framework of ICO
There are two ways to release the token on blockchain:
- You can first collect a minimum amount of money, specified by the offer, and then release the tokens and divide them among investors in proportion. For this purpose usually a special site with the investor’s office is organized, for example chronobank.io;
- You can also sell the token on the cryptocurrency exchanges. To this end, it is necessary to release it in advance that allows trading them on one or several exchanges simultaneously. In this case, the ICO process becomes identical to IPO traditional process.
After the completion of sales of tokens in any of these ways, the issuing company begins to implement the declared commitments to investors. Since the cryptocurrency market is still young, and there is no mechanism for its regulation as such, let us talk about the risks faced by the investor of ICO.
Regulation of the cryptocurrency market is a technical problem, and few people understand how to regulate the processes taking place within it. Virtual economy, carrying out all its transactions via Internet payment, without direct contact of the seller and the buyer is always fraught with risks. ICO is no exception.
According to our experts, the majority of the existing projects up to 2017 may turn out to be fraudulent, because to invest in the virtual economy is easier, and people put their money almost “not looking” at any company with a more or less decent presentation without conducting a quality Due Diligence (DueD).
DueD exists in the financial economy and, as a rule, presents an in-depth analysis of the investment object and provides it in the form of a report. The analysis includes an assessment of investment risks, a thorough investigation of the company, a comprehensive review of its financial condition and market position, expertise and previous experience of the attracting team. Only experienced investors can afford DueD who use the services of appropriate specialists.
In case of cryptocurrency economy and ICO, Due Diligence is often conducted cursorily, which leads to investment in projects that are not backed by real business. We can see this on the example of equity crowdfunding of all kinds of lotteries and casinos. To protect the depositors, by analogy with the traditional financial market, new players appear on the cryptocurrency market - rating agencies.
These agencies conduct independent Due Diligence, make analysis of all the information about the company, entering the cryptocurrency exchange, and publish the results of their research in the form of an independent rating review indicating the strong and weak points of projects.
To minimize the risk of investors, companies that provide the services on launching ICO, cooperate with rating agencies. Therefore, Ambisafe entered into a partnership agreement with ICORating rating agency that provides additional reliability of joint projects.
ICORating conducts the research of all aspects of the project, which stand for specific cryptocurrency financial instrument. The company analyzes the investment risks of the project entering ICO, in the following areas:
- business model (its relevance, strong and weak points);
- market niche (prospects and dynamics of the selected market niches for building business);
- team (business experience in the traditional market segment, in blockchain industry, blockchain-development experience);
- competition (competitive pressure level on the part of companies with similar business models of the traditional market segment and blockchain-economy);
- technical background (availability and quality of the prototype or source code);
- analysis of the feedback from the community;
- and many other aspects.
Thus, investors in the public domain see how risky this or that investment is.
“From our own experience, we strongly recommend prospective investors to study the subject of investing in more detail or refer for analysis to professional rating agencies. Rating agencies will help companies entering ICO organize all the necessary information, which will improve the reliability factor of the project in the eyes of investors - CEO of Ambisafe Andrii Zamovskyi says - Today we have been engaged in the issue of cryptocurrencies for two years and have seen disappointing statistics of fraud in this field”.
One more way to protect against potential fraudsters is a cryptographic escrow, carried out with the help of Multi-sig purses and independent escrow agents. This means that the company does not collect money directly but with the assistance of third parties.
The funds are collected on Multi-sig purse that can be accessed only from the deposit agents, which in turn provides additional protection. Thus, the company cannot spend the collected money without the digital signing of the agent.
The duties of the depositary agent include checking the fulfillment of the terms of the offer by the company and implementation of the terms and obligations to investors. Only in case of compliance with the stated terms, the company gets access to certain sums of Multi-sig purse.
Here is what it looks like in real life: the company collects $1,000,000. The plan of the implementation of the business model is divided into 10 periods. The company receives the first $100,000 from the Multi-sig purse right after the stage of raising money. Further, the deposit agent monitors execution of the stated conditions, integrity of the issuing company, observance of the terms and, in case of successful completion of the first phase of the plan, gives the following part of the sum. If the company does not fulfill its obligations, the money remains frozen on the purse to the fulfillment of the obligations or is returned to the investors.
In conclusion, we would like to note that the rapidly developing blockchain-economy and growing ICO market repeat today the history of formation and development of the traditional stock exchange market, but at high cutting speeds.
Some of the projects that are currently carrying out ICO have the capacity to eventually grow to an enormous size, and repeatedly return the investments put. Many investors today remember the time of entering IPO by companies such as Apple, Amazon or Google and assess what capital they could have earned, if they had invested in these companies at that time. Today ICO market provides another chance to participate in the success stories of the new economy projects, both for investors and for companies whose founders want to create really important projects.
Our partners and we see our goal in making the way of investors and projects towards their goals more reliable, understandable and effective - reducing risks, maximizing the potential profits, increasing market transparency and stability.