The perfect token sale structure


Spoiler alert: it doesn’t exist

With a new blockchain token sale happening every few days, it’s a good time to examine the different ways that token sales can be structured.

It’s important to remember the differences between (1) how the token and the network actually function, (2) the problem that the application or protocol is trying to solve, and (3) the structure of the token sale. This article focuses only on the third point. I am a lawyer, but this article isn’t about legal issues.

What is a token sale? What is an ICO?

‘ICO’ (Initial Coin Offering) is a misleading term for a token sale. This is especially true for many people who are exploring the blockchain and token space for the first time right now.

Unlike an IPO— which is a well understood and rigorous process for taking a private company public — a token sale is an unregulated sale of digital assets that represent the potential value of an early-stage project or concept. The investment thesis is much closer to venture capital than investment in a public company.

There are many phrases that describe this better: ‘token sale’, ‘token launch’, ‘crowdsale’, ‘pre-sale’, ‘token generation event’, ‘token sale offering’ or really almost anything other than ‘ICO’.

A properly designed token sale doesn’t promise ‘investment returns’, ‘dividends’ or ‘profits’. Instead, it focuses on selling a digital asset that will have a clear use case in a decentralized application, as a means of both incentivizing development and solving the chicken-and-egg problem for the network. A properly designed token actually serves a purpose: it is required in order to participate in the network, rather than just being a funding mechanism.

We designed the Blockchain Token Securities Law Framework to explain how this distinction also affects the securities law treatment of a token.

What are the objectives of a token sale?

Here are some of the things that a developer might want their token sale to achieve. This isn’t a complete list, or a comment on any particular project. As we’ll see, a number of these objectives conflict with each other. It’s up to the developers to decide which of these things are most important to their project.

Raise a capped amount. You might want to limit your total raise to align with your actual costs of developing the network. You might not want the responsibility (or the resulting attention) of securing and holding far more money than you were expecting to.

Sell a fixed percentage of total token supply. You might want to be certain about the percentage of tokens that you are selling vs allocating to the development team, investors etc. While there is no clear standard about what percentage should be sold versus kept, you might want to have control over this decision.

Distribute tokens widely. You might want to try to distribute your tokens to a large number of users to ensure that your decentralized application is actually decentralized. You might not want a large number of tokens concentrated in the hands of a few token holders, especially if your network is going live shortly after the sale. Secondary markets could also help to improve distribution.

Sell tokens at the market value. You might want to let buyers decide the fair market value of your token. On the other hand, it is difficult for buyers to value the token, especially if there is a long development period before the network is launched.

Guarantee that all buyers will get some tokens. You might want to give all buyers the opportunity to participate in your sale, rather than only those who can get their money in the quickest.

Enable buyers to buy an ascertainable percentage of the total token supply. You might want buyers to be able to know what percentage of the total supply that their purchase represents.

Of course, there is also the objective of actually raising enough money to fund the development of the project. However, in the current market, where many capped token sales meet their objective in a matter of hours, if not minutes, this is less of a concern.

What token sale structures are available?

Here are some of the token sale structures which have been used to date, together with some alternative structures.

Capped First-Come First-Served

  • A fixed number of tokens is sold at a fixed price on a first-come, first-served basis until all tokens are sold
  • There is a cap on the amount raised (expressed as a cap on the number of tokens to be sold)
  • Insiders (i.e. foundation, investors and/or development team) are allocated a fixed percentage of the total token supply

This is the most common structure used in token sales to date. Some sales provide a discount for a limited period to encourage early participation. However, in the current climate this is unnecessary for most token sales, and has probably exacerbated the FOMO-driven early sellouts for the most anticipated sales.

Uncapped

  • An unlimited number of tokens is sold at a fixed price over an extended period
  • All buyers can buy as many tokens as they desire
  • No cap on the amount raised
  • Insiders are allocated a fixed percentage of the total token supply

Capped Auction

  • Buyers bid a desired price and total spend
  • A variable number of tokens are actually sold, at the lowest successful bid price, in proportion with each buyer’s pledged total spend
  • Can be a dutch auction or a blind auction
  • There is a cap on the amount raised
  • Insiders are allocated a variable percentage of the total token supply, depending on how many tokens are sold in the sale

Uncapped Auction

  • Buyers bid a desired price and quantity of tokens
  • A fixed number of tokens are sold to the bidders in descending price order until all tokens are sold
  • No cap on the amount raised
  • Insiders are allocated a fixed percentage of the total token supply

Capped with re-distribution

  • Buyers bid a desired total spend
  • A fixed number of tokens are sold at a fixed price, in proportion with each buyer’s pledged total spend
  • Buyers’ excess payments are refunded
  • There is a cap on the amount raised (expressed as a cap on the number of tokens to be sold)
  • Insiders are allocated a fixed percentage of the total token supply

This structure guarantees that everyone can participate to some extent. However, if the sale is oversubscribed, buyers will receive fewer tokens than they wanted to buy, and a partial refund of payment.

Capped with parcel limit

  • A fixed number of tokens is sold at a fixed price on a first-come, first-served basis until all tokens are sold
  • There is a limit on the total amount that each buyer can buy. This could be achieved by capping the amount of each incoming transaction, and making it difficult for a single buyer to send multiple transactions — for example by generating unique codes for each buyer in a way that is difficult for buyers to automate
  • There is a cap on the amount raised (expressed as a cap on the number of tokens to be sold)
  • Insiders are allocated a fixed percentage of the total token supply

If effective, this model could promote a wider distribution of tokens, preventing concentration in the hands of ‘whales’, while also selling a fixed number of tokens with a capped raise.

Are there other alternatives?

There are other alternatives to doing a public token sale — including selling to accredited investors only. In many ways, this isn’t really a token sale, but rather a private placement of securities to a closed group of buyers. In any case, the buyers need to be identified and KYC’d, which means that participation is limited. Such a sale may also cause a regulatory problem for secondary trading, because securities are only able to be traded on registered securities exchanges.

How do these structures stack up against the objectives?



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