Costs of an ICO offering
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Low issuance costs due to the efficiency savings of blockchain-based solutions are considered one of the main advantages of funding through ICOs. The only costs associated with early token sales were the technical costs of setting up the infrastructure and developing the protocol, as well as exchange fees for converting tokens, since advisors were rarely involved back then.
While cost benefits were intuitive for the first generation of ICOs, which effectively benefited from regulatory uncertainty, regulatory loopholes, or even regulatory arbitrage, this is less and less true as ICOs mature and move out of the unregulated realm.19 The development of costs associated with ICO issuances follows the development of financing mechanisms and today includes advisory fees (legal, financial, security), large marketing costs, listing fees and other post-ICO costs such as community management services.
Anecdotal evidence suggests that ICOs are still a cheaper way to raise funds than IPOs today: according to some market players, ICOs pay around 3% of all funds raised for offerings of around $1 million, compared to 3-5%. IPO rate. More importantly, IPOs carry additional fees of around 7% which are paid as compensation to the underwriters (investment banks) who underwrite the share issue.20
The distribution of ICO costs therefore varies between offerings depending on the underlying technology, jurisdiction, size, and other structural characteristics. The main components of such costs are similar across the board and include technical costs, legal fees, other advisory fees, marketing costs and listing fees.
In absolute terms, according to industry players, the cost of an ICO can be as low as $60,000 USD and as high as $500,000 USD.
The technical fees include the creation of the token used in the ICO and the development of the protocol on the basis of which the project is run. ICO tokens are mainly based on the ETC20 protocol of the Ethereum blockchain, which are easy to process and are inexpensive compared to developing the original token on its own blockchain. Technical fees are also paid for the development of smart contracts, which are the basis for all transactions on the platform. Ongoing technical fees must be paid to developers so they can review the platform and agreements repeatedly, fix bugs or weaknesses in the code, and avoid hacking.
Legal fees are paid in exchange for advice on the regulatory framework applicable to the offering, the drafting of appropriate language in the prospectus (see ICO Primer in the appendix) and other contractual and marketing documents. Issuers can also pay for help in preparing a professional and credible white paper, which is increasingly important as markets become more congested and investors wary of scams. Other advisory services for ICO launch contracts may include specialized companies that perform the verification and accreditation (KYC process) of token buyers.
Marketing spending has been important for companies that want to stand out and capture consumer interest with advertising, PR and social media campaigns and innovative marketing tools. Issuers have designed “Bounty Programs” to award tokens to social media influencers and marketers in exchange for promoting their product/service. In some IPOs, up to 5% of all tokens are reserved for such reward programs. Similarly, bonus structures such as size discounts, discounts for early investors or referrals are used to incentivize investors and impose costs on the issuer.
Marketing and communications, both at launch and throughout the duration of the project, are taking up an increasingly larger portion of ICO costs in today’s increasingly crowded ICO space. Post-ICO communications involve additional fees, and issuers are sold specific community management services aimed at ensuring the creation and maintenance of a vibrant network around the project/service. Platforms that aggregate information about token issuance may charge c. 500 USD for a listing (e.g. Topicolist.com), while premium status and acceptance on such a platform can cost up to 25,000 USD (e.g. Coinschedule.com) (Amsden and Schweizer, 2018).21
Shortly after the ICO, issuers must secure token listings on crypto exchanges to ensure liquidity for their tokens. Listing fees for issued tokens can reach up to $1 million depending on the reputation of the listing venue (Autonomous next, 2018). These fees compare to USD 125,000 to USD 300,000 for a traditional stock exchange (main market) plus a corresponding annual fee to remain listed. Securing a listing not only provides liquidity to token holders, but is seen as essentially critical to the viability of the project and the company, which may explain the disproportionate amount of fees involved.
Although the fees applied by crypto exchanges for converting tokens to crypto exchanges are not directly related to the offering, they can be considered an integral part of the ICO’s cost structure. Regulated cryptocurrency exchanges charge a conversion fee for each transaction on the amount converted, in addition to the difference applied to the cryptocurrency exchange rate. Such conversion fees are much higher than currency conversion fees.