Many initial coin offerings are launching a smaller coin sale just before the big blockchain launch event. Pre-ICO, also called pre-sale, is another type of crowdfunding event where tokens are sold. The only difference is that early investors get bigger discounts compared to the actual ICO. Do not confuse these two events as they have different structure and outcomes.
Why did this practice appear? Pre-ICO events generate a lot smaller amounts of funding and tokens are often sold with a generous bonus, sometimes up to 80 percent off. Offering a bonus 50 percentage of the token price is becoming a norm. The pre-sale is usually held from several weeks to one month before the actual event.
How Pre-ICOs Are Different
Pre-ICO has a completely different structure than a cryptocurrency ICO. Its smart contract is designed in such way to ensure that funds raised during the pre-sale are not added to the funds raised during the main event. The company needs to be very vigilant with reporting the actual funds raised during the whole initial coin offering so that they would be able to report the crowdfunding results to the regulators. Transparency is key to maintain the trust of investors.
Pre-ICO has a lot of benefits for the project, one of them is building of trust and another is raising awareness. But the true reason why companies are risking their profits and launch pre-sales is that this is the perfect way to attract angel investors to support the project. Similar to the angel round when the company goes public, a successful pre-ICO often guarantees the success of the main event.
The raised capital during the pre-ICO is often used to fund the main ICO token sale as it provides much-needed operational expenses. Angel investors could form a very small portion of the fixed amount needed for the project launch, the so-called hard cap. The raised funds cover a lot of costs on building the infrastructure of the project, while the team is busy with prototype constructing, business development, marketing, white paper editing, or adjusting the project roadmap.
The disadvantage of pre-ICOs for startups is the situation when early investors often get rid of their tokens at ICO prices once the new coin can be traded at a cryptocurrency exchange. Since the early investors grab tokens at bargain prices, they cannot resist the urge to maximise their profits. As a result, investors earn a substantial profit but the overall token’s value diminishes. The company launching a pre-sale has to be very confident that the main event will generate even more sales and that the value of the token will stay attractive.
To enter the pre-ICO investors join the whitelist, a special membership list that grants them access to massive discounts if they buy tokens at pre-ICO stage, as well as access to bounty program and other rewards. This helps build an army of supporters that in turn develop trust and reputation of the project. Among the benefits that early supporters get are the lower token price, bonuses and rewards, as well as some tangible perks, for example, access to the alpha and beta versions of the software or application, the ability to suggest modifications, and more.
Moving On to ICO
After a successful pre-sale the project usually is ready to start the development of their product, while getting ready for the actual ICO. Usually, a successful pre-sale generates a good amount of free publicity and public awareness of the project. During the ICO tokens are sold at full price. The capital being raised becomes a working capital for the company used to fund the future growth of the business, including any additional infrastructure.
At the moment ICOs are considered a legitimate way of raising capital for digital startups. Residents of certain jurisdictions are banned from participation in token sales, so it’s worth checking the legislation in your country, just to be sure. As long as you stick to the terms and conditions of the sale and deposit a certain amount of Bitcoins or Ethers, you can consider yourself an investor.