A More Equitable ICO? Why Blockstack Said No to a Token Pre-Sale

Blockstack isn't going along with business as usual for its initial coin offering (ICO).

As the new funding method gains momentum, token issuers have often allowed investors to access tokens in so-called "pre-sales" in advance of opening up to the public. The pre-sales, aimed at injecting money into projects early on, are often competitive, and for good reason, the prize can be a steep discount over market price.

But Blockstack, a startup whose "modest" goal it is to create a new infrastructure for the entire internet, won't be offering a pre-sale for its new token set to go on sale Nov. 13.

Concerned that large buyers were scooping up most ICO tokens during prior pre-sales, Blockstack co-founder Ryan Shea told CoinDesk:

"We think it's just really antithetical to what decentralization is about, so we considered that with the design of this entire process."

Other industry observers have lamented on the pre-sale process, wondering how an ICO that making such an offering is any different than the traditional investment model that the new blockchain-based mechanism is trying to disrupt.

But skipping the insider phase isn't just about Blockstack getting to moralize on the state of ICOs – the company believes scrapping the pre-sale will have benefits for its business model.

"For us, it's really important that we have a wide distribution of the tokens because we really believe that, if those users are to become stakeholders of the ecosystem, we want a very diverse representation of what the ecosystem is," said Blockstack co-founder Muneeb Ali.

Distribution focus

It isn't just that Blockstack wants a wide distribution; the company needs it.

If the startup's going to sell the internet on a new architecture, it has to deliver network effects quickly. According to Blockstack, people who hold tokens will have an incentive to use the system and maybe even build products for it, so the more token holders, the better.

In this initial token launch, Blockstack is distributing 440 million tokens to existing shareholders (like employees or investors) based on their equity and selling 440 million in the ICO to accredited investors only.

A third pool of 440 million tokens will be distributed to the existing Blockstack community (such as developers) through vouchers. The vouchers will be held in reserve until an undefined vesting period is over, Shea said, in an effort not to trigger SEC rules on selling securities.

After that, holders of the vouchers will be able to redeem vouchers for Blockstack tokens at the initial ICO price at a point when the company's counsel decides the tokens function as a commodity.

The voucher system gives existing Blockstack shareholders a sort of free call option, providing them the opportunity to buy the tokens in the future at a fixed price. So once vouchers activate, if the tokens are selling for $10 each, but they ICOed at 10 cents, voucher holders stand to make a 100x return on every token they exercise their option on.

According to Ali:

"We deeply care about our open-source community and developers. So we spent a lot of time figuring out a legal framework where they could participate in this process."

The mechanics of the system are broken down in a document released last week, which outlines how the price will be determined by the level of interest during pre-registration, which started Nov. 1. The Blockstack token will be the first sale managed by CoinList since it became an independent company.

The 1.32 billion tokens created during the initial release are not all the Blockstack tokens that will ever be created; more will be produced through mining when the Blockstack protocol goes live.

Venture privilege

But as pre-sales have benefits for startups, Blockstack's abandoning of the idea likely also has to do with its position as an already well-funded venture-backed company.

Blockstack's VC investors include Union Square Ventures, Lux Capital and Digital Currency Group, and those investors, according to the startup's founders, have yet to pressure the company to maximize monetary gains in the short term.

In this way, Blockstack being able to focus on using the ICO less as a cash-grab and more as a tool needed to interact with the platform is a kind of privilege not all projects get.

And eliminating the pre-sale isn't the only unique thing characteristic of Blockstack's ICO.

Unlike most token issuers, the firm isn't turning over management of its tokens to a non-profit organization.

Instead, earlier this year, Blockstack reorganized as a public benefit corporation (PBC), a legal identity that allows companies to make additional commitments to the public in addition to its fiduciary obligation to shareholders. To that end, the Blockstack PBC has committed to keeping its network decentralized and releasing its software as open source.

"Because we can have a single entity, we don't need to create other non-profits in a different country and get into complicated situations, which you will notice is something other projects are still struggling with," Ali said.

With these deviations from "normal" ICO model, it wouldn't be a stretch to say that Blockstack's whole roadmap is a critique of the ICO market to date.

As Shea said:

"We were disappointed in a lot of the previous sales, especially in the way they were run."

Marc Hochstein contributed reporting.

Disclaimer: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Blockstack.

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