An ICO pre-sale (or pre-ICO) is a tokensale event that startups offer before the main ICO crowdsale.
A small percentage of the total available tokens will go on sale and the idea is to give interested investors an opportunity to buy tokens before the official ICO date.
It can either be to a group of selected, private investors (by invitation for example) or open to the general public through the tokensale webpage.
For the sake of prudence, and to avoid a mix-up between pre-ICO funds and funds from the main ICO, pre-sales will often make use of different smart contracts.
This makes things much simpler when it comes to account reconciliations and audits.
The price of the tokens on the pre-sale will be different to that on the official ICO but the two events should take place within a short-period of each other. It will avoid major price fluctuations in Ether and Bitcoin, which investors will need in order to take part in most tokensales.
What is the purpose of an ICO-presale?
There are a number of reasons a startup will conduct a pre-sale.
It could be to test the waters before the main event. This would give management an indication of the level of interest in the project and whether or not they need to intensify their marketing and promotional efforts to reach the funding goal for the official ICO.
An ICO-presale can also be seen as sort of a beta launch. Because it’s smaller and therefore more manageable and controllable, if something does go wrong, it’s much easier to fix with fewer people affected. This way they can smooth out the kinks before the main event.
A recent trend in pre-sales, which seems to be working, is to get private VC investments at a bigger discount behind the project at an early stage.
What are the benefits of an ICO pre-sale?
The biggest advantage for investors will often be the opportunity to buy tokens at a discount. This discount can be as much as 50%.
Tokens are sold for cheaper because the fundraising target will typically be lower than for the official crowdsale.
Many ICO’s are heavily oversubscribed, so taking part in a pre-sale will also ensure you are allocated with the amount of tokens you wish to purchase.
Projects can use the funds raised from the pre-sale to ramp up investor interest for the official ICO through additional marketing and meetups. It will also cover the expenses that were incurred in the run-up to the pre-sale.
A pre-sale will further ensure that the project has already gained some traction by the time the official ICO rolls by. If potential investors see that the project has already enjoyed some backing, it will instill confidence and make them more likely to take part in the tokensale.
Are there any drawbacks to ICO pre-sales?
Some investors are only in it for the short-term gains.
To do this they will buy in the pre-sale at a discount and sell a couple of weeks later when the token is listed on an exchange at the regular price, therefore making a profit.
It is, unfortunately, the nature of the game.
The downside to this is that such a sell-off can cause a decrease in the value of the coin and hurt the credibility and appeal of the project.
An ICO pre-sale can also fall foul to specific US securities law. This is because of something called the Howey Test to determine if an asset should be considered as a security.
With an ICO, the token development has been completed and can be distributed. Therefore, it will most likely not be classified as a security under the Howey Test.
But if a project is raising funds to develop the token with a promise to distribute it at a future date, it can be classified as a security and run into some SEC regulatory restrictions and reporting requirements.
To avoid having to exclude US investors, there is a legal framework in progress to argue against pre-sales being classified as securities. The SAFT (Simple Agreement for Future Tokens) hinges on digital tokens failing the Howey Test and therefore comply with US securities law.