Young and growing cryptocurrency companies need to raise money, much like any start-up or mature company. To fund their projects, crypto companies have adopted blockchain technology and popularized token sales, which saw a sharp increase in 2017 and 2018. A crypto start-up produces proprietary blockchain tokens for sale that may represent different rights. Moreover, tokens can be sold via private or public sales. Initially, start-ups could use this funding method mostly unrestricted and without a middleman. However, various jurisdictions are trying to legalize 'all things blockchain' with the maturing crypto ecosystem.
This article aims to throw some light on public sales in crypto and various ways to raise funds via a public sale.
Capital raising has taken on a new meaning with the emergence of social media and readily available worldwide communication enabled by the internet. The cryptocurrency industry has created new opportunities for supporting crowdfunding initiatives that leverage blockchain technology, allowing modern enterprises to raise funds via three stages: private sale, pre-sale, and public sale.
A small group of critical investors can access a private early-stage investment opportunity. In exchange for cryptocurrency that has the potential to produce significant profits, the goal is to entice early investors to support a particular project. Similarly, a pre-sale is a terrific way to acquire a better deal or bonus (based on the level of contribution) than a crowd sale and avoid any negatives that may arise during a public sale.
However, a public sale is typically held when a currency does not meet its objective cap during the pre-sale. An asset or service is released onto the market via websites and platforms for token exchanges like Coinbase during the public sale phase. At this point, the general public can acquire it.
Blockchain-based businesses can raise money via various methods, including initial coin offerings (ICOs), security token offerings (STOs), initial public offerings (IPOs), initial exchange offerings (IEOs), initial DEX offerings (IDOs), and initial stake pool offerings (ISPOs).
An ICO's primary goal is to enable cryptocurrency token sales to investors in exchange for cryptocurrencies like Bitcoin or Ethereum. The Peer-to-peer (P2P) Mastercoin project held its first token sale in 2013, raising roughly $500,000 in freshly created Mastercoins against the payment of Bitcoin. Since that was the first ICO, numerous companies have been inspired to leverage the Bitcoin blockchain for P2P financing, thanks to the success of this fundraising campaign.
Additionally, in the first 12 hours of the 2014 Ethereum token sale, 3,700 BTC, or roughly $2.3 million, were raised. Before an ICO crowd sale, a document called Whitepaper highlighting the company's present and future growth plans is published to create general awareness among the public. Then tokens are issued that can be traded to generate profits without going through a lengthy regulatory process, as in the case of traditional IPOs.
Nonetheless, the negative reputation that ICOs have developed over the years results from this unregulated atmosphere as exit scams and dubious business practices increased between 2017 and 2018, which led to criticism, negative media coverage, and greater regulatory monitoring of the crypto industry.
Security tokens are a digital representation of asset ownership created to protect investors from fake ICOs. Therefore, regulation + ICOs= STOs as security tokens are issued by regulated financial authorities, and their goals and plans are published in a publicly available white paper. The U.S-based Praetorian Group was the first company to introduce an STO, and it registered the platform with the U.S. Securities and Exchange Commission in March 2018.
Security tokens can be utility, equity, debt, and asset-backed tokens. Tokens that can be used to purchase goods and services are called utility tokens. On the contrary, tokens representing stock are called equity tokens, while those representing debt are called debt tokens. Similarly, asset-backed tokens grant users ownership rights over valuable digital assets (both tangible and intangible).
An act of selling shares of a privately-owned company to retail investors is called an initial public offering. Like conventional IPOs, the cryptocurrency firm that chooses to raise capital through an initial public offering will be subject to intense public scrutiny and must adhere to the regulations the agencies overseeing public corporations set forth. Information about IPOs is mentioned in the whitepaper, just like ICOs and STOs, and then investment banks and underwriters promote the project to potential investors.
Before starting the IPO, they provide the required paperwork to satisfy the legal requirements, and after the successful completion of the IPO process, the company’s crypto assets trade on a stock exchange. The first cryptocurrency exchange platform to conduct an IPO on the regular stock market was Coinbase. It was listed at the Nasdaq Stock Market in April 2021.
Cryptocurrency exchanges conduct IEOs on behalf of businesses that are raising money through token sales as opposed to ICOs in which a holding company’s own platform organizes the fundraising process. In response to the countless instances of ICO fraud that have occurred over the past several years, entrepreneurs and businesses have begun to prefer launching IEOs for cryptocurrency funding because they undergo a higher level of due diligence. Additionally, IEOs are preferred over ICOs because they are carried out through third-party exchanges. Exchange platforms are in charge of supervising transactions and may also provide assistance with development and marketing.
For instance, the trading platform Binance Launchpad has assisted many blockchain companies in raising money through initial exchange offerings. To help investors locate early-stage future crypto projects, assess whether they are worth investing in, and take part in the token presale process, launchpads use particular vetting procedures to help filter out scams, and crypto rug pulls.
A mechanism known as an initial DEX offering raises investment funds from retail investors and issues tokens on a decentralized exchange. A well-designed website and a well-written whitepaper are the prerequisites to aware people of the IDO. An IDO will be accepted if the project complies with the platform's compliance requirements. After approval, an organization seeking funding creates a cryptocurrency token and lists it on a DEX like Sushiswap to raise funds from interested investors. IDOs offer quick access to tokens compared to ICOs, which have a preliminary waiting time for liquidity and trade. IDOs also have the advantage of having the issued token listedright away on the DEX where the IDO took place.
Using Cardano's delegated proof-of-stake mechanism, an initial stake pool offering is a novel way for a project to raise money. In this process, the project manages a stake pool and distributes its tokens to delegators in exchange for regular staking incentives. MELD, a noncustodial lending protocol based on Cardano, completed the first ISPO in November 2021. MELD raised $10 million through the ADA staking rewards from more than 40,000 delegates in less than five months.
In contrast to STOs, IDOs, and IEOs, ISPOs don't require KYC (know your customer); anyone can participate, regardless of their financial situation or nationality. For example, one stake pool in the Genius Yield ISPO had only 50% of the ADA staking incentives given to Genius Yield when it reached its peak allocation of approximately 270 million GENS to four separate stake pools. This degree of delegation can result in fresh financing of more than 100,000 ADA every epoch.
Entrepreneurs in the cryptocurrency sector don't want to stand in line to attract venture funders' attention. Instead, they have discovered more effective strategies for raising money for their initiatives. From the iconic initial coin offering toinitial stake pool offering, there are many cutting-edge techniques that cryptocurrency businesses can utilize to raise money for their endeavours. However, it is good to prcatice a caution and consider pros and cons of each method before taking a decision given that crypto markets are highly volatile.