Initial Coin Offerings (ICO) are growing increasingly popular as a method of funding emergent technology companies. Basically, the ICO allows these tech companies earlier access to funding than is available through debt lending or equity investment channels. To learn more about how to invest in ICOs, visit the LawTrades blog.
In this article, we discuss the various costs associated with undertaking an ICO.
Technology Development Costs
Most (if not all) companies undertaking an ICO are technology companies. They develop some sort of software or virtual service or platform for future clients or end users. The intrinsic value of the token or coin being sold is that it represents future value on this platform. Of course, most companies undertake the ICO before the underlying value proposition is fully developed. They intend to use the ICO funds to pay for the continued development. This role may belong to a company co-founder. If not, you can expect an employee (market-rate) salary from $100 – 200K per year. Of course, you would compensate that individual with either company equity or tokens.
You need to make investors aware of the nature of your company’s value proposition. This is done through a document known as a “white paper”. You are trying to explain to the investor why the company’s value proposition will be valued and accepted in the market. It will explain in detail how your technology solves some customer need or want. It should also be apparent how or why the offering will be accepted at large. This is your company’s first impression with investors. If you want to have a successful ICO, you need to make certain the explanation is well developed and thorough. Developing this document will take hours of diligent work. Normally, it will be done by a company founder and will not cost any (or very little) money to complete.
Token Smart Contract
The company must create a coin or token to be sold in the ICO. This is known as a “Token Smart Contract”. There are generally two categories of token. One is a cryptographic token that native to a blockchain that you developed for your own software system. Basically, you develop the blockchain system that allows for self-verification of the coins. The downside of this type of coin is that it can generally only be transferred within the company’s existing system. This is a very detailed computer science and programing project. Completing this task requires the skills of someone who can command a $100-200 per hour for work.
The second type of token is an ERC20 (or ERC20-compliant) token. This token meets the structural characteristics — it contains a transfer function — to make it transferable on established exchanges (move from one address to another. Again, completing this task requires the skills of someone who can command a $100-200 per hour (if you can find that person at all).
In either event, it would take a talented coin developer anywhere from 100-200 hours to develop a cryptographic token along with a company’s block chain. It will likely take approximately 100 hours to develop an ERC20-compliant token.
Crowdsale Smart ICO Contract
Because the ICO is generally not carried out through an existing exchange, the distribution must be carried out by a system developed and controlled by the issuing company. In this way, the issuing company is the counter-party in the exchange with the individual purchasing the coins. The technology system used to control and distribute the coins in exchange for another cryptocurrency (such as Ether) is known as a Crowdsale Smart ICO Contract. A smart coin developer would be able to piggy back off of the work of existing ICOs, but it would still take 50-100 hours to develop the Smart ICO contract — at a rate of $100-200 per hour. Recently, companies have begun to avoid developing the Smart ICO contract and have employed the services of an existing coin exchange. Basically, the company creates and transfers the ERC20-compliant coins to an existing exchange. This exchange then handles the distribution (sale) process. The terms for handling this process is generally a pre-determined percentage of the coins being offered.
Smart Contract Audits
The most important aspect for maintaining investor confidence in the coins being offered is security. You must make certain that the coins remained safe against unauthorized transfer. Unauthorized transfer generally happens when individuals hack into an individual’s holding account or hack into the transfer system (or block chain verification system). As such, it is important to run continuous smart contract- audits for vulnerabilities. A complete audit can take from 50-200 hours. Expect a cost from $10 – 20K or larger companies from $20 – 50K.
Legal Structure and Regulatory Filings
The coin offering should be done as a legal business entity. This will require forming an appropriate entity structure (generally a corporation) with governance documents adequately defining the roll or rights of coin holders, shareholders, directors, and officers.
Most ICOs issue coins or tokens are backed by the company issuing the token. This generally means that the coin only has value because it represents the value or productivity of the underlying company. This qualifies as an “investment contract” — a “security” under the traditional securities law regime. The issuing company will need to either register with the SEC (a long and expensive process) or perfect an exemption from registration through an exemption. This generally means perfecting an exemption under Regulation D (of the federal securities laws). Also, it means perfecting the same exemption under state law. Both require the development of an extensive and thorough disclosure document. Much of this will piggy back off of the white paper. Hiring an attorney to handle the securities law portion will generally cost from $10 – 25K.
Making the public aware of the ICO is incredibly important for a successful ICO. You are going to need investors, and potential investors will want to see that there is some buzz around your company (as well as its ICO). You will need to use traditional and non-traditional channels, such as tech magazine advertisements, direct emails to fund managers, social media posts (Reddit, Facebook, LinkedIn), etc.
This type of marketing can be anywhere from free to thousands of dollars.
The legal professionals at LawTrades are experts in technology law and securities offerings. They can provide you with the advice and legal services necessary to effectively carry out your ICO.