Introduction

After the token economics are set in stone and the tokens are minted, it’s time to distribute the tokens to the public and/or allow investors to buy tokens. There are several ways to put the tokens in the hands of the users. Additionally, tokens can be distributed by conducting a public sale or other token launch mechanisms. There are different approaches to token sales and we are going to lay out the most common ways to launch a token or to create secondary markets. They all vary in benefits, drawbacks and legal implications.

Type: Token Sale | Risk of being perceived as a Security Offering: High Risk

Pros

Decentralized & inclusive

Immediate token liquidity

Cons

May favor whales & bots

Less Vetted Projects

• investors get legal rights to underlying assets | - complex set up
• restricted to accredited investors | Security by design | | Initial Exchange Offering (IEO) | Token Sale | - less fraud risk for investors
• exchange listing & marketing | - KYC for exchange users required
• potentially expensive | very high risk | | Initial DEX Offering (IDO) | Token Sale | - decentralized & inclusive
• immediate token liquidity | - may favor whales & bots
• less vetted projects | high risk | | Initial Farm Offering (IFO)/Lockdrop | Price Discovery Mechanism | - rewards active participation in DeFi
• can distribute tokens more equitably | - requires understanding of yield farming
• high risk of Impermanent Loss for users | low risk | | Liquidity Bootstrapping Pools (LBP) | Price Discovery Mechanism | - fair price discovery
• disincentivizes bots & whales | - complex for users to understand & participate
• high price volatility in the beginning | moderate risk | | Liquidity Backed Auctions (LBA) | Price Discovery Mechanism | - fair price discovery
• encourages early participation | - incentivizes bots
• early volatility | moderate risk | | Fair Launch | Price Discovery on the market afterwards | - maximizes decentralization
• no pre-mine or pre-sale | - no initial funds for development
• can lead to high initial price volatility | low risk | | Direct Listing | Price Discovery Mechanism | - exchange listing & marketing | - no funds raised
• potential low liquidity or market maker needed | low risk |

<aside> 💡 If a token launch is classified as a security offering will ultimately depend on many things, such as jurisdiction, how exactly the launch was conducted, how the tokens were generated as well as other factors. This is by no means a legal classification/advice, but rather an overview of how different launch mechanisms have been treated by authorities in the past.

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1. Traditional Token Sale Mechanisms

Token Sales are most of the time a clear “investment of money” and often times those early protocols depend on the “essential entrepreneurial efforts” of their founding team, which likely makes them a security under the Howey Test. As such, token sales are most likely to be considered security offerings, which could lead to legal repercussions if unregistered. We are going to outline four different token sale mechanisms: ICOs, STOs, IEOs and IDOs.

Initial Coin Offering (ICO)

An Initial Coin Offering (ICO) is one of the earliest and most well-known token sale mechanisms. It involves the issuance and sale of new cryptocurrency tokens to the public in exchange for existing cryptocurrencies like Bitcoin or Ethereum, or sometimes even fiat currency. ICOs were prevalent during the 2017-2018 crypto boom, but regulatory concerns and a high number of scams led to a decline in their popularity.

• Open for Deep Dive

Security Token Offering (STO):

A Security Token Offering (STO) is a token sale that involves offering security tokens to investors. These security tokens represent ownership of assets, profit-sharing rights, or other financial instruments, and they are subject to securities regulations in various jurisdictions. Unlike utility tokens offered in ICOs, security tokens have legal backing, making them a more regulated and compliant way to raise funds for blockchain projects.