Stakeholders in the burgeoning market for initial coin offerings (ICOs) have reached consensus: the practice of presales needs to be reformed.
Originally conceived as a way to bootstrap new tokens by covering their legal and marketing expenses, some ICO issues are now offering crypto-insiders steep discounts on tokens and better distribution terms in presale rounds, where the public at large isn't invited to invest.
Yet, others say an overzealous market has made presales more of a main event.
For some of the less buzzy ICOs, most of the money appears to be coming through private rounds. Ripio raised $31 million of its $37 million token offering in its presale and Swarm raised nearly all of its $5.5 million funding from its presale.
Brayton Williams, a co-founder of blockchain incubator Boost VC, is no stranger to the market. Having been involved with bitcoin since 2013 (at one time pledging to back 100 bitcoin startups), he's yet to greet the ICO market with the same enthusiasm owing to these problems and others.
He told CoinDesk:
"Everyone wants to invest in a presale. No one wants to invest in a public sale."
And this mentality illustrates the dangers of presales to both projects and investors.
Take an example, let's call it ThisCoin. ThisCoin releases a white paper in January. In February, it offers a presale on its token with a 50 percent discount. The ICO runs in March and all the tokens sold get distributed on April 1.
It follows that presale investors would be almost guaranteed to roughly double their principle if they sold immediately in April.
To some, it would almost feel foolish not to.
Sid Kalla, a crypto-economics expert and co-founder of the Turing Advisory Group, told CoinDesk that he believes this effectively warps the incentive structure for ICOs.
In an industry that touts incentives as a backbone for product building, he perhaps sees this as more alarming than ironic.
"The presale discount should reflect the risk being taken on by the early project backers," he said. "Otherwise they have an incentive to invest in projects without proper due diligence because they can take a profit with minimal risk when the token is traded on exchanges."
Question of fairness
Yet, the example above certainly isn't "one size fits all."
Many token projects take years to reach the market (ethereum, for example, didn't release an early version of its software for 12 months). Other much-hyped sales, including those for Filecoin and Tezos, that boast new blockchains, could take similar timelines.
But others believe it's not so much the potential for quick profit taking that's the trouble, but how it degrades the whole point of ICOs to begin with – that everyone from farmers in Idaho to Silicon Valley board members were to be given an equal seat at the table.
And some are pushing back. We covered a startup called Blockstack that recently snubbed presales when it sought to raise funding for its decentralized internet software.
"We want to have a sense of fairness, that everyone gets the same terms and everyone has the same price," co-founder Muneeb Ali said at the time.
Which squares with a surprising take from someone on the investor side.
Fred Pye – the CEO of 3iQ is a Candadian innovation-oriented fund for institutional investors that's now working on crypto asset-based products – said that avoiding the presale is simply a matter of ethics and principle.
Even though his firm would be able to get a better deal by accessing those early rounds, he said it's not doing so.
"The entire space gets more legitimate the fairer they treat everyone," he said.
But other investors see a place for presales, just not the way they are conducted now.
One of the co-founders of a new fund named Multicoin Capital argued that the ICO market needs to become more sophisticated, and presales are a key part of that process.
"I think the fact that the first money in gets a significant discount compensates those investors for the risk that they are taking on by being the first," Tushar Jain, one of the fund's cofounders, told CoinDesk.
Still, he believes reform is needed. "The current presale structure is collapsed too much," Jain said. "I think we'll borrow the concept from the current VC world of actually having funding rounds.”
So, for example, a discounted presale would fund a product's development phase, with an ICO closer to its market debut. Rather than the way it works today, where the ICO follows almost immediately on the heels of its presale – all of which precedes even a beta test of the product.
But change may be coming from the market itself.
One rea-world project we found operated a little bit closer to that model, at least insofar as it had a basic working version of its product before soliciting funds. Simple Token is building a platform that offers companies "all the benefits of a token without the drama of an ICO," CEO Jason Goldberg, told CoinDesk on the day of its own presale.
Goldberg said Simple maxed out its presale discount at 30 percent for investments over $1.5 million and locked everyone in the offering into the same year-long distribution.
"If you're going to do presales, you should keep presales to a minimum, say 25 to 35 percent of the offering, and make sure the people doing the presale are locked in, in exchange for a discount," he said.
Yet, there's still the matter of determining what actually changes should ICOs adopt more of the characteristics of traditional venture capital. Does that mean it will end up looking just like venture capital does now? Or will it only be taking what's best from VC while still generally democratizing technology investing?
Obviously, we can't know yet.
"Everything is an experiment in crypto," Williams said. "I hope we’re moving in the right path and learning from the past."