Five Things to Keep in Mind while Raising Funds through an ICO
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
Raising funds for a new business has always been a rigorous and tedious task. The long process of regulatory clearance makes most startups look for feasible alternatives. There are three ways in which a startup can raise funding - equity-based funding, debt-based funding or crowdfunding. ICOs are nothing but crowdfunding campaigns in which contribution is in the form of Cryptocurrencies.
Over the last 4-5 years, blockchain based solutions have started to make their presence felt in the business landscape. Through Initial coin offerings or ICO, these startups offer utility tokens and pre-sell the rights to use the product/service that they are developing to crowdfund their campaign.
ICOs offering security tokens sell fractional ownership in the company. The process can be easily initiated without multilevel regulatory clearance. It also provides high liquidity with minimum transaction cost. Globally, ICOs are changing the way start-up ecosystem operates. Based on the trend and its increasing popularity, below is a guide for other companies that may be looking to raise funds through ICO:
Jurisdiction, regulation and compliance
Even though ICOs allow capital formation by raising funds through cross-border sources, the business still needs to consider the regulations of the country where the ICO has been originated as well as from where it expects to receive funds. Regulators all around the world have been evaluating possible risks regarding ICOs, especially for retail investors.
Some countries like France have already started curating formal guidelines about ICOs. All that a company aiming for an ICO has to do is to keep a tab of the existing regulations and be absolutely compliant with these. In most of the cases, banks do not convert Cryptocurrency into Fiat currency if KYC of contributors has not been done by the company.
Fund requirement and utilization
Just like red-herring prospectus during IPO or an investment pitch to VCs, the business should clearly communicate the requirement of funds and how does it plan to utilize it. This is fundamental to get the investor’s attention and to assure them that the company aims to utilize the funds effectively.
However simple it may sound, the importance of this communication cannot be overstated.
What kind of tokens should be issued?
Tokens issued during an ICO can be divided into three basic categories. These are Security Tokens that mirror the features of a financial security, Utility Tokens, that allow the investors to access the services provided by the company, and lastly, Payment Tokens that are used for payment.
The company should clearly state the type of token, the strategic purpose of the solution, and things that differentiate it from others to receive the desired subscription.
Safety and security
While blockchain is largely considered the safest method for developing smart contracts and making transactions, there have been instances of a security breach in the recent past. Therefore, the company looking for raising funds through ICO should clearly state the safety mechanism, i.e., how the company plans to protect the issued tokens from hackers, scammers and phishers. This could be done in-house or by outsourcing the system security to a third party.
Moreover, the security mechanism cannot be static. It needs to be a step ahead of those looking to make a dent in the system. It is a must to get the ICO Smart Contract audited by a reputed audit company to safeguard Investor funds. Any new Cryptocurrency or payment token should immediately release their source code to allow the community to find any backdoors or malicious code that can be used to siphon off investor funds. The company should also have robust security measures in place to safeguard its social media channels access and an active strategy to protect prospective investors from phishers.
Building and managing the community
An ICO is just the start of the journey. To sustain in the long run and raise follow up funds, the company needs to work on building and managing the community all the time. This community involves the investors, regulators, security experts, analysts and advisors, and other relevant influencers. This is just like any other community management campaign. The key to this campaign is real-time communication that builds trust and respect.