Cryptocurrency investors should understand the difference between an ICO and a token presale. A token presale occurs prior to an ICO launch. In a presale, the startup offers up tokens while they are still under development before they are available to the general public. The purpose of the token presale is either to raise funds for further developing the project at its very early stages or to fund the operations that will lead to the ICO launch. As the risks involved when investing in a token presale are much higher, the tokens are (in most cases) offered at a discounted price.
It is important to note whether a token is defined as a utility or as a security. As the tokens offered during a presale reflect a future value, they are usually considered to be securities. In such cases, since securities fall under the purview of the SEC, companies should consider registering and complying with the SEC’s regulations.
“Depending on the facts and circumstances, the offering may involve the offer and sale of securities. If that is the case, the offer and sale of virtual coins or tokens must itself be registered with the SEC, or be performed pursuant to an exemption from registration. Before investing in an ICO, ask whether the virtual tokens or coins are securities and whether the persons selling them registered the offering with the SEC.” (SEC’s Investor Bulletin 07/2017)
Token Presales as a Speculative Investment
As speculators aim to get tokens at the lowest prices possible, token presales have gradually become the main event in a new startup’s public offering. Ripio, for instance, raised $31 million out of their total $37 million during the presale.
Presales are often a way for select investors to get the insider advantage by getting the first crack at discounted tokens. Another downside to presales for the everyday investor is that the lower price offered during the presale often has a negative effect on the value of the tokens at the ICO stage because presale investors often unload their tokens immediately after the ICO. As the number of ICOs grows, ( they doubled between July and August 2017), speculators see presales as an opportunity to benefit from the guaranteed margin between the presale price and the public offering price. As they immediately liquidate their discounted tokens at the ICO launch to secure their profits, the result is often a decrease in the token’s value shortly after the ICO begins.
"The presale discount should reflect the risk being taken on by the early project backers, 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.” – Sid Kalla, co-founder of the Turing Advisory Group (Coindesk.com 11/2017)
Notable Token Presales
Kik, the popular chat application, managed to raise $50 million during their presale last August, which was limited to select investors. Venture capitals including Pantera Capital, PolyChain Capital, and Blockchain Capital acquired 488 billion tokens of the Ethereum-based Kik for a price discounted by 30%. The ICO that followed a month later, added $47.5 million from 10,000 ordinary investors.
“We are really excited, if you had told me back in January that we would sell $100 million of a new cryptocurrency in September, I wouldn’t have believed you.” – Ted Livingston, CEO at Kik (TechCrunch 09/2017)
Cofound.it broke the record (up to then) for the most successful token presale ever last June by selling all their available tokens within 60 hours. Subsequently, the startup canceled their scheduled ICO after exceeding their target by raising $14.8 million.
“As Cofound.it moves into the next phase of developing its distributed venture capital platform that connects exceptional startups with world-leading experts and investors, we would like to humbly thank our supporters and investors for helping us close out our pre-sale in such grand fashion,” said Jan Isakovic, CEO of Cofound.it.
The 8-day presale session of ICOBox, a tool that offers management, legal, and marketing solutions to leverage ICOs, collected $8.3 million last August. ICOBox suffered Bitcoin’s insane volatility due to the Chinese ICO ban. The amount raised during the presale was higher than the amount gathered after the ICO, with a total of $14.5 million.