How to Launch An (ICO) Initial Coin Offering
The intro’ to the basics for startup founders.
Looking for a New Cryptocurrency check out the introduction to Metabase Want to launch your own ICO? apply now at Token Deck.
Disclaimer: The following is not legal advice. The author is not a lawyer. This is not legal advice.
I have had many companies contact me directly to help launch an Initial Coin Offering “ICO”. Normally I ask: what is your time table to launch? The most common answer I receive is: “ASAP”. This is possible if you have the resources and plan in place to execute a perfect launch. Read on
I anticipated the time where startups would have to go through a kind of “digital revolution”. It has been about 20 years since being a ‘tech’ was pioneering anything. Just like the billions made from dot com’s. Bitcoin takes off and suddenly, everyone got crypto fever and everyone wants to do an Initial Coin Offering (ICO) now.
I have always been the lone hacker mentality. Finding the knowledge, learning the code, and teaching myself to write the programs. Now the I feel it necessary to help the founders, and enterprises that are currently coming to their blockchain awareness.
What to know:
Below outlines some of the items that one should consider when approaching an Initial Coin Offering or “ICO”, and how to go about preparing oneself for the long-term viability of a project.
These are some questions that you need to be prepared to answer. I cannot help you answer them all now. However, this article will give you the foundation for you to be able to assess your ability to start the process correctly.
This is a small amount (about 10%.) of the questions that you should ask yourself. There are always more things to consider when you learn more.
Is technology a platform?
Does your platform add to the crypto/blockchain community? Make sure your idea isn’t already being served by someone else?
Will your technology need a token? Or need one?
Will you offer your token? — If so, How? Direct token distribution, convertible note, or voucher?
Will you issue and/or accept contributions: Bitcoin, Bitcoin Cash, Litecoin, Ripple, or Ethereum
Do you have a large network? Can you buy one?
Do not call it an Initial Coin Offering or “ICO”?
Alright now let’s get down to brass tacks…
You don’t make it big.
Don’t put out a banner asking to be investigated by the SEC. Not smart.
From the utilitarian perspective. The crypto that is supposed to power your application, is more like a token at Dave & Busters, donations for access to a product/experience on crowdfunding sites, or casino chips.
A better term for this emerging process is a “Token Generating Event”, or “Token Donation”. In certain jurisdictions, this term is a specific and distinct definition. This term with the proper structure, provides clarity to the regulators on what exactly you are doing.
Opportunity Cost
All people look at the huge opportunity with ICOs. Many rarely look at the downside risks involved for doing one poorly. There is actual risk involved with this type of technology, and emerging forms of social trust. Be mindful of your goals.
Founders have the ability to woo and talk with the much needed kingmaker “angel investor” venture capitalist. This allow focus directly on the real value; their team, technology, and community. You already have responsibility to your shareholders. That is increase as your team grows to support a whole stakeholder platform.
Though ICO’s are a common undertaking, that may not have any future value. ICO’s can be considered an “investment scheme” in certain jurisdictions. This warrants plenty of legal consideration. You are not just beholden to three of four guys that are buddies, contractually — This is a whole community of potentially millions of people ready for legal ambiguity, and very real default laws.
Okay, so who are these people?
Know Your Client (KYC) and Anti-Money Laundering (AML) with pseudonymous tokens
Here in the crypto sphere we are very attentive to privacy. Hell, it’s primarily what spawned the tech in the first place. However, as the technology becomes mainstream it runs into real world laws.
With integration
With integration of the crypto world into real world jurisdictions, we see the laws that govern each franchise are becoming reality. This should be embraced by everyone because the benefits far outweigh the downsides. Remember in some legal jurisdictions, depending on what legal definition is placed on cryptocurrency, you may be required to get a BitLicense(NYC Only), or follow best practices in KYC and AML laws.
Where are your clients from, what is their nationality, where do they reside, there name, and over a certain transaction level: where did their money come from?
I don’t think people want to be make it easy for terrorists to launder money. It is wise to find out about the guidelines in your country/jurisdiction and learn what the process is. Always stay up to date, as you might think you are doing enough, but the way your KYC and AML process is done makes a difference when it comes down to defending your company or yourself.
Do you know the laws in your jurisdiction?
In your lifetime you want avoid as many government agents as possible. Ask Snowden about that.
Should you be lucky enough to live in a country where the regulatory body has set out guidelines, make them aware of what you are trying to do, they are there to help and guide you through the regulatory process. It is only fun to a select few, but doing it will keep you out of hot water.
If you do not have an active and engaged regulatory body with clearly stated guidelines, there are many references and resources, this may provide you with the basic level of what your country or jurisdiction currently definitions as cryptocurrencies. You can find all the links to the current definitions on Wikipedia and Reddit.
Pushing tech to the unknown is what this industry is all about and we are all still learning.
Is this the opportunity to be a leader in your area by advocating for reform and or regulatory innovation? Then step up, be inclusive by recognizing authority of the regulator by pulling them into the process. This is new for them as well too. What I believe you will find is that if you approach people, whether they are lawyers, accountants, technologist, or regulators, many are willing to embrace vanguard projects, more than most would think, because just as we’re all competing for the future, so are they.
Get a lawyer
First, you don’t need a “blockchain lawyer” or a virtual currency expert. Simply because you will be hard pressed to find one, they are few and far between — and even if you do, they will be back logged for a year because of their growing ICO pipeline.
What you need is a logical, rational, and curious lawyer who understands:
Corporate formation
KYC , AML, and Compliance
Crowdfunding
Securities law
Data privacy
Tax law
As Peter Thiel says: “competition is for losers”
so try to find YOUR lawyer.
Preferably a small team from an intimate, but international firm, as the larger firms tend to be just branded legal mills that are supported by huge multinationals that need to churn out wrote legal widgets to satisfy massive regulatory demands.
As long as she is curious, and thorough, many of these types of lawyers will get excited about working in an emerging area of the law, and will see this as a challenge where they can distinguish themselves and their firm.
Take the time to review this well thought out document by Coinbase A Securities Law Framework for Blockchain Tokens, in fact, once you have identified some potential counsel, bring this along with you to your selected lawyer, so you can ground them in a probably unknown subject like cryptocurrencies and the thinking that is going on in the space. This will provide you with a context and a general blueprint for your discussion and you can fill them in with some of the other happening in the industry.
Want to launch your own ICO? apply now at Token Deck.
What jurisdiction, and why you should have a global perspective
Token Events are coming in all shapes and sizes these days, many of them are actually complex in their structuring for necessary reason. The choice of your jurisdiction will dictate who you are directly regulated by, the structure of your offering, as well as who you can and cannot offer your tokens to, or what the encumbrances are if you decide to reach a global market.
Ethereum has set the trend for companies setting up Foundations in Switzerland, which is a Civil law jurisdiction with a variety of different types of vehicles depending on the needs and the function of your team and technology.
Some other jurisdictions worth looking into are Liechtenstein and Mauritius, but bear in mind, the political/regulatory stability, as well as the prestige of the jurisdiction is something that you should consider when choosing the proper domicile for your formation.
However, organizations are not limited to the formation or jurisdictions above. Singapore has provided some guidance on virtual currencies, which is good, as it provides a basic framework for lawyers to work from. In addition to this, the MAS sandbox is available to startups and could prove to be a useful domicile for companies that would want to leverage the nation’s strong government, rule of law, and competitive spirit.
For US companies, this is a process cannot be understated. Just because your company is listed offshore does not mean you are immune to the long reach of the SEC. In fact, the SEC has rolled a few regulatory bodies and they have no problem with extraterritorial adjudication to get what they need to get you and your company. To be contrarian to the common sentiment of the crypto-world, it is probably best that you make them your partner by complying with US regulation as a means of upping your quality and game in the eyes of your supporters and token holders.
It is trust that emerges ultimately as the ‘coin of the realm’ not only in the money bazaar — Edwina Thompson
In the crypto world, the most valuable “coin” as the quote mentions, is trust. Once you have lawyered up and your concept is tight, there are a few things that you must get in order to make a strong proposal to your community.
Capability Trust
Your Founder’s images and bios should be online, transparent and available to review. This includes your advisors. Supporters should be able to see who you are, what your background is, and be able to understand how your background and capabilities lend to the type of technology you are developing. There are a lot of scams and people running off with tokens without delivering the product. People want to know what you have done in the past and what you are capable of doing now in this emerging space. This should be reinforced by the activities below.
Technical and Business Trust
Do you have a thoughtful proposition of your technology that is in the form of a Position paper? A Position paper is not your “deck” in black and white A3 paper. It is a clear 2–3 page argument that you are trying to make that is supported by your technology proposal.
Once you have had your position paper out for a while, hopefully you have posted it on your website, or showed it to people privately. Your nascent community will be able to make comments, and suggestions that you can develop the Position paper into a White paper.
A Whitepaper details specifically how you propose your technology will actually work. These documents typically have very detailed architectures, unique scripts, user flows, a go to market strategy, a value proposition, and more detail about your growing team and advisors. Many have token distribution terms, and a usage of funds description that will tell supporters how you propose to go about your endeavor. It’s not so much a prospectus in the traditional sense, but it acts very much like one. Most of the sophisticated crypto supporters will not even consider you if you do not have this in place, and properly structured. Technologists and developers will not take you seriously if you are not proposing something that warrants a token or the underlying technology is fluff, so take your time in presenting your best ideas and your process in your whitepaper.
The more sophisticated crypto/blockchain companies will offer a Yellow paper, or a second “technical” white paper, that will take much of the first two papers and actually present in scientific detail the technology and the innovations that they have created or propose to create. In many cases the technology is tested and/or peer reviewed. I believe that the near future of token offerings will require this level of detail.
A great example of this approach is Dr. Gavin Wood of Parity. His whitepaper on Polkadot is a great example of someone who takes his work, the community that supports him, and his company’s reputation very seriously.
Social Trust and Network Effects
If you haven’t already read the following books, I highly suggest you purchase, read and re-read these two books, as it will be the basic foundation for how you should think of blockchain networks, your technology, and the metrics that drive your community.
Information Rules
Platform Revolution
Once you have a basic understanding of platforms and network effects and keeping in line with the transparency and competence of your team. The following social media platforms are integral to building credibility, trust, and your network.
Reddit and Bitcointalk
Don’t be afraid, jump in. There can be some ruthless trolls in these network, but without it, you and your technology are essentially non-existent. The great thing about these forums, is that it allows you to highlight your unique differences to the community, as well as for the community to get to know you and your vision for your technology. Most of the vetting and due diligence for projects will be done here.
Remember, just because someone doesn’t like what you offer, doesn’t mean it’s not good. Find the people that love what you do and try your best to be responsive and deliver undeniable value to your emerging supporters and potential user base.
Reddit and Discord
Having a long-term approach, by putting yourself out there and staying engaged with your community cannot be stressed enough. Reddit and Discord have become the default way for organizations in the crypto/blockchain space to stay relevant and connect to their supporters, users, and developers. People need to feel like they know who you are, and you are accessible to them. The most successful token offerings, and platforms all have a maniacal focus on their communities and realize that the value of their network is an intrinsic element of their sustainability.
Legal and Token Trust
Another emerging framework for people to get their projects off the ground was proposed a while back by Jack Du Rose of Colony with his Safe Agreement for Future Tokens. It is a take on the Ycombinator SAFE agreement, and it is another basic primer that you can provide your lawyer with to structure a “pre-sale” for your token so you can ramp up to your token sale. The proposal does require some modifications based on what was expressed earlier, but it is a simple and elegant tool that could provide an attractive offer to early stage investors who see the crypto/blockchain disruption happening in the traditional investment industry.
Token mechanisms and models
If you have decided to move forward with your project, and as I said earlier in this piece that there are many parts to doing a token offering that go beyond the scope of this paper, you will need to know what is the actual mechanism or model that you will use to raise the funding that you need for your project.
Vitalik Buterin has written a great article: Analyzing Token Sale Models that will allow you to understand some of the ways that organizations are experimenting with offerings at the moment. It also outlines the inspiration for developing best practices in the space. As a companion piece to Vitalik’s article, also read Vlad Zamfir’s A Safe Token Sale Mechanism.
Hopefully, this basic introduction to how to do an ICO will send you off in the right direction.
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