How Token Sales get Airdrops Wrong

TL;DR: Some Token Sales think that airdrops of tokens can help them avoid regulations and increase valuation. This is not the case.

ICOs that have sold a majority or all of their tokens in pre-sale rounds often revert to a relatively small airdrop of tokens (<5% of token supply) to people who were subscribed to a public sale which got cancelled after all capital was raised in the pre-sale.

While airdrops can make economic sense (they broaden the initial user base, thereby increasing the potential network effects of the protocol/application), we’ve seen some ICOs revert to airdrops because they believe that:

a) Airdrops reduce the regulatory footprint in terms of securities laws:

“We’re not ‘selling’ tokens to people!”


b) Airdrops increase a project’s valuation instantly:

“After our pre-sale in which we sold 10 million tokens at $1/token, we’ve now created 10 million additional tokens that we’re giving away for free, so our valuation is now $20M!”

Although we’ve slightly exagerrated them, both types of reasoning are wrong. Here’s why:

ad a) Airdrops are still subject to securities regulation: Imagine you’re a team launching an ICO and you’ve just concluded an oversubscribed pre-sale of your tokens. You raised funds from accredited/institutional investors only and have done a full KYC check on them. You cancel the public sale because you have enough money and because you think that a public sale carries too much regulatory risk of selling security-like tokens to unaccredited investors. However, you now have to deal with 25k angry members of your Telegram channel and 10k twitter trolls who had all subscribed to the public sale.

Therefore you decide to airdrop some tokens to keep them happy.

If [insert favorite regulator here] comes knocking on your door in a few months and you answer with “But we’ve only sold tokens to accredited investors” you really need to read this Coincenter article about airdropped tokens being subject to securities regulation. Alternatively, read this article about Oprah’s Ultimate Car Giveaway if you prefer memes.

ad b) Airdrops should not affect an ICO’s “valuation”: Imagine you’re a team launching an ICO and you’ve just raised $36M by selling 36M tokens at $1 in a private round to accredited investors. For all the right reasons you decide that’s more than enough money to build v0.1 of your dApp on ETH testnet and cancel the public sale. However, you still want people to give your dApp a try once it launches.

Therefore, you decide to airdrop 4 million tokens to people who showed interest in your dApp.

Despite the fact that your tokens were sold at $1/token in the private round, you’re NOT adding $4M of extra value to your project by just creating an extra 4 million tokens out of thin air. Unless $4M miraculously appears in your cold storage wallets, your project’s valuation is closer to $36M than $40M. If you still believe the latter number, tell your in-house “cryptoeconomist” to read up on everyone’s favorite Italian-American Nobel prize duo.

(N.B. for the econ geeks among you: We acknowledge that tokens are strictly speaking not the same as equity, but we do believe that increasing the number of outstanding tokens for no monetary compensation should have de-facto dilutive effects on the price per token. Any increase in value per token attributed to increased “network effects” caused by the airdrop is unlikely to outweigh the dilutive effects)

via TokenData


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