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Digital assets remain resilient despite last year’s calamitous events. Crypto, NFTs and web3 have made their way into investor interests and recently, the crypto crowdsale has been getting a decent buzz.
This begs the question of why there is a need for crowdsale — despite the existence of IDOs, IEOs and crypto launchpads. While these are great financing options, no one-size-fits-all products exist. With a crypto crowdsale, businesses can exert more control over the digital assets in circulation for targeted audience pools.
Investors often mistake crowdsales for ICOs (initial coin offerings). While there is some resemblance, ICOs and crowdsales are distinct in one fundamental way: an ICO is subject to securities laws, while a crowdsale is not. With these essentials covered, it's time to dig into what a crowdsale actually is and how it works.
The term “cryptocurrency crowdsale” refers to a blockchain or crypto creator raising capital for infrastructure investment, project development or expansion. The concept is akin to approaching a venture capitalist to raise funds, but with a twist. One perk of a crowdsale is that it obviates SEC requirements necessary for IPOs. Instead, new cryptocurrencies, non-fungible tokens or other forms of digital assets are released to the public via the crowdsale. In return, the funds raised are repurposed to refine the project.
Still, it’s important to note that the coins or tokens don't always represent a stake in the actual company. The coin or token may have a monetary value, or only be redeemable as in-house credits.
While a crowdsale does resemble crowdfunding, such as that on sites like Kickstarter, it's not precisely the same. Traditional crowdfunding typically promotes and sells a future product of some kind. Invest at a certain level, and you get a version of the product when it goes into production.
Crowdsales don't sell a future product. Instead, they sell coins or tokens. Invest a certain amount, and you get a certain amount of crypto in exchange. The business running the crowdsale must make some key decisions going into the sale. For example, most businesses set soft and hard caps on the targeted funds. The soft cap is the minimum amount the sale must raise to be viable. The hard cap is the maximum amount the company will raise during the sale. Beyond that, the company must also set rules for the cryptocurrency it issues, for example how coin or token holders can use the crypto in the business.
Remember that in order for a project to qualify as a crowdsale, the crypto can't function like a stock in the company that generates money for holders. The crypto must have a specific utility to the business, such as acquiring services later.
Once the business team establishes the rules of cryptocurrency, they move on to promotion. The type and extent of the promotion will depend a lot on how much the company wants to raise, and whom the company wants to use its services later.
With the rules and marketing campaign hammered out, the business will need a platform to facilitate sales. If the business has a comprehensive in-house IT department, it might run the sale through its own website. If not, they'll likely turn to a third-party platform to deal with the technical logistics. Most commonly, creators of crypto rely on blockchain technology to set parameters and guidelines for a smart contract to reduce fraudulent transactions and promote transparency. Buyers and sellers can engage in the sale when a mutual agreement has come to terms to be executed.
With more terms and concepts continually cropping up in the crypto scene, it can be difficult to distinguish between a crowdsale, launchpad and IEO. Let's look at each one to get a better feel for them all.
A crypto crowdsale is almost always handled as a direct transaction between a project and its investors. It's often a way for the project creators to make the business more accessible to longtime supporters who want to use their services later.
A crypto launchpad, sometimes referred to as a crypto incubator, is a gateway for project creators to list their projects that haven’t yet been made public. This means anyone who wants access to these pre-public projects must have an account with the exchange.
In most cases, new members must successfully navigate a "know your customer" process that verifies identity and performs a risk assessment. Assuming a person passes KYC, they can receive access to pre-public crypto projects listed on the crypto launchpad.
The initial exchange offering, or IEO, is essentially a public version of the crypto launchpad. The business or project forms a business arrangement with the crypto exchange. The partnered crypto exchange will handle the IEO’s promotions, like coin distribution via airdrop, and the sale of the tokens or coins from business to clients (B2C).
Crowdsale projects spring up all the time. Your best bet is to take a similar due diligence approach by getting recommendations directly from people reputable in the crypto scene.
Dive deeper into the platform's track record, historical data, trading volume, and assets under management — and, most importantly, evaluate reviews of the platform. Also, consider how long the platform has been in operation. If it only launched three months ago, there will be much less information to evaluate. If the platform has been around for five years, simple longevity offers some assurance that the platform provides quality crowdsale projects.
Like most kinds of investment, crowdsales have their fair share of pros and cons. Let's look at some of the pros first.
One of the critical advantages of participation in a crowdsale is that it lets a person get in early on a new cryptocurrency. While the intended function of the coin or token may be internal use, opportunities to sell it for a profit will come later.
Of course, those advantages also come with some disadvantages. The main disadvantage of crowdsales is that they’re high-risk. Investors don’t know if they'll ever get to use their coin or token for its intended purpose, and they may never get a chance to sell it.
Crowdsales are, by definition, unregulated by the federal government. This means that taking any action against a business that runs a crowdsale can prove very difficult. It's very much a caveat emptor situation.
Although crowdsales are unregulated, the definition of crowdsale remains largely up to bodies like the SEC. If the SEC decides that a crowdsale is actually an ICO, it can put both the business and investors in a tight spot. The business may face action for not filing the appropriate paperwork, while investors might discover they must scramble to make sure everything is in legal order on their end.
Crowdsale scams can prove more difficult to spot than more traditional scams. By design, crowdsales are often pre-public, which limits available information. While nothing can completely protect you from the possibility of a scam, there are some steps that can limit your vulnerability.
Do as much research as possible in advance. Find out as much as possible about the business or crowdsale project as you can. Did the business appear “overnight” two months ago? Is there any evidence that the business exists, beyond a website or social media presence? If the business looks to be fly-by-night, it's best to take a pass.
Deal with reputable platforms whenever possible. Reputable platforms typically perform some due diligence before approving a project for crowdsale.
Consider the sources of information about a crowdsale. As enthusiastic as a favorite celebrity is about a crypto crowdsale, they aren't any better informed about the pertinent information than the average investor. Whenever possible, seek out the thoughts or opinions of financial professionals.
Consider the plausibility of the claims from the business. Businesses will typically talk openly about how they plan on using the money they raise from the crowdsale, as well as how much they plan on expanding. Are the stated goals consistent with the amount the company seeks to raise? If not, it's likely a scam.
There is some gray area around this question. On the one hand, if someone knows about a crowdsale, there’s a decent chance that they have a working knowledge of the crypto world. On the other hand, they may simply have been told about it by someone they know.
Some general guidelines can help you decide if you're suited to crowdsales. Don’t invest money that would otherwise go into more traditional investments, such as IRAs, and don’t invest money that you can't afford to lose if the investment goes south. Crowdsales are best suited to those with experience investing in more traditional crypto opportunities.
Crypto crowdsales are an exciting option for crypto investors because they fall outside the rigidly regulated world of ICOs. The government doesn't treat them as securities, mainly because the coins or tokens only provide value as an internal business asset. Yet, there’s also a greater possibility of running across scams because of inexperience or an absence of information. For experienced crypto investors, however, crowdsales can offer an excellent way to get in on the ground floor of a new cryptocurrency.