4 Mistakes To Avoid When Holding A Token Sale
Initial coin offerings – or token sales – have redefined the way startups get funded. 2017 has seen a series of record offerings with at least five token sales hauling in more than nine figures each. So far, over two hundred token sales have been kicked off this year, generating over $3.25 billion in total funding.
Token sales are seen as a more favorable option compared to traditional means of funding. It typically takes years before companies can hold initial public offerings (IPOs). Taking on angel investment and venture capital often means you have to cede control or equity and business loans can limit your cash flow flexibility.
Holding ICOs have also become easier and faster. New blockchains such as Ethereum have opened up their platforms to developers. Smart contract services like Waves have made contract and token creation easier. Auditing services such as Hosho also help ensure that ICO smart contracts are safe and work as intended.
ICOs allow startups to work around these. By essentially crowdfunding capital, it eases the pressure of ventures such as having to meet return of investment targets and scheduled loan payments.
Startups can also be at very early stages and still be able to attract investors. This gives opportunity for many cash-strapped entrepreneurs to fund their projects.
That said, a successful a token sale still requires a deliberate and measured approach. These sales are often viewed by the market as an indicator of a venture’s potential so pitfalls have to be avoided. Here are four key mistakes to avoid when holding a token sale.
Failing to Address Security Vulnerabilities
Since you’d potentially be dealing with a lot of money, holding an ICO places a target on your back for cyberattacks. It is critical to ensure that all technologies related to your ICO are secure and free from vulnerabilities.
Several ICOs have fallen victim to hacks with attackers leaving with chunks of the investors’ money. Take the case of CoinDash and the attack on its ICO last July. Hackers changed the Ether address to which participants sent their investments allowing attackers to get away with what was then worth $7 million of Ether coins. Etherparty, which recently just started its own ICO, suffered a similar address-swap attack.
You should also check vulnerabilities in your ICO smart contract as these could result in faulty transactions. The Dao hack showed that vulnerabilities in the smart contract code can prove disastrous. The fault led to the theft of $60 million worth of Ether. Few things could be more frustrating for investors than losing their money due to a system error.
In these instances, having your smart contract code reviewed by third parties like Hosho should give you another layer of protection. You risk losing investor and customer trust should issues arise from faulty contract code. Tapping external expertise should prove a wise investment.
Once a smart contract is deployed, that code cannot be changed. That permanence requires a meticulous process for writing the contract because the smallest bug or problem can have disastrous consequences. Instead of programming as if for a web application that gets updated regularly, proceed as if your code is deploying a rocket and make sure to get comprehensive audits by top-notch specialists.
You should also secure your social media and communication channels since they can be taken over to launch phishing attacks to your investors. Prior to its ICO, Enigma’s mailing list, website, and Slack channel were taken over by attackers which were then used to convince investors to participate in a fake early ICO.
Lacking Communication with Investors
Speaking of social media channels, it’s also important to be active in communicating with investors during an ICO. The global reach of ICOs can make this quite challenging. Investors may be scattered across various social media and messaging platforms which typically include Facebook, Twitter, Reddit, Telegram, Slack, and Bitcointalk.
It requires real effort to manage and address queries across multiple channels. For example, Electroneum has already enjoyed a degree of success after its recent ICO quickly reached its hard cap. However, the team decided to increase security measures which delayed its scheduled release of tokens to investors. Though the team has been posting sporadic updates on its Twitter and Facebook accounts, many eager investors waited days before CEO Richard Ells addressed questions over live video on Facebook. Its Bitcointalk announcement thread is currently among the longest in the message boards.
Exciting concepts and ideas could draw a variety of potential investors to your channels. Your ICO might even be the first for many fledgling crypto investors. Preparing an FAQ or easy-to-understand explainer videos would help orient them on your ICO. Aside from addressing investors’ concerns and question, you must also be prepared to gracefully manage online trolls and detractors.
Governments now have varying positions regarding the legalities of ICOs. Many are now keen on clarifying rules in order to protect their citizens from fraud. What this means is that you have to ensure compliance with the laws that govern your company or risk penalties and lawsuits for non-compliance.
The US Securities and Exchange Commission, in a report published after investigating The Dao, ruled that ICOs are subject to federal securities laws if the tokens can be considered securities. ICOs seeking to involve American entities must then comply with these regulations. Many ICOs have now restricted US citizen participation due to this regulation.
As an option, you may take due diligence verifying who participates in your ICO. A good way some ICOs manage this is through whitelisting and know-your-customer (KYC) mechanisms. For reasons of anonymity, some people avoid ICOs that require KYC but putting such mechanisms in place can help you ensure that you are only involving legitimate investors.
Non-compliance becomes a major issue that could expose companies to further suit. Tezos, which held one of the most successful ICOs to date, was recently reported to be caught in infighting and is now facing legal troubles. It is facing litigation by a firm specializing in consumer protection. The class-action suit was filed in behalf of investors who have yet receive their tokens from the sale for alleged securities fraud and violation of securities laws.
Using Dubious Sale Mechanics
Your token sale must also have well-defined mechanics so that everyone concerned would be guided accordingly. Details like which coins will be acceptable for funding, price, duration, bonuses, intervals, supply, and caps should be communicated clearly.
Establishing caps on the sale can also show that you have a clear purpose for seeking investment. Good ICOs even define the specific activities on which portions of the proceeds will be spent. Holding uncapped sales typically indicates that the company itself is unsure of its own valuation.
EOS, for example, is currently running a year-long uncapped ICO. It is unclear how much money they would need to develop their platform and why they need a year of funding to do it. To top it all, the clause that states "EOS TOKENS HAVE NO RIGHTS, USES OR ATTRIBUTES" in their purchase agreement has been considered by some as a red flag.
Earning Investor Trust
Your ICO shouldn’t just be about the money. It should also be about gaining their confidence and trust. Providing investors with a hassle-free ICO experience helps them view your company as a professional and capable outfit. A positive ICO experience also encourages participants to band together as a community to support your venture. Their trust is crucial for your further success down the line.