In a world where governing bodies limit participation in the investment of startups to powerful institutions or elite individuals, the advent of Vitalik Buterin’s Ethereum network promised an opportunity to level the playing field, at least a little bit.

Prior to Ethereum and the rise of the token economy, the most effective ways for companies to raise capital were through private equity or through a much larger, and far more regulated, funding mechanisms such as an initial public offering (“IPO”) or direct public offering (“DPO.”) In both scenarios, companies raise capital by selling equity, or shares, of their company at a predetermined price. Extremely high investment thresholds and the regulations that are inherently attached to traditional capital raising methods exclude individual investors; investors who may be very eager to invest but can only spare much smaller sums of capital.

The past few years birthed a new way businesses and projects could raise capital: the initial coin offering (“ICO.”) Unlike an IPO, a company that is hosting an ICO is not selling equity in their organization. Instead, the company raises investment capital by selling a “coin” or, more often it seems, a “token.” In the case of a project that is selling a token: the token’s value is derived from its utility relative to the underlying technology being developed by the company hosting the ICO. When participating in a project’s ICO the investor’s hope is that the adoption of that project’s technology will increase. Since the token purchased at the time of ICO must be used to interact with the features of the platform, the laws of supply and demand will require an increasingly higher market price for the token as adoption increases and users need more tokens to interact with the platform on hand.

Most ICOs require the exchange of other, more bluechip-esq, cryptocurrencies for their project’s native tokens. Towards the beginning of the ICO era, minimum contribution limits set by projects and organizations were extremely low; often times they were low enough that someone with little more than pocket change could afford to participate in an ICO. Early ICO investors were barely subject to government regulations concerning investment in digital assets because the topic had not made it to legislator’s desks.

The advent of smart contracts allowed for a safe and automatic way to settle the sale of tokens to investors. A smart contract is a protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract without involving a third party. In the case of an ICO, the smart contract simply facilitates the exchange of the ICO’s token for another form of cryptocurrency at a pre-determined and agreed upon exchange rate. This process is very simple and requires little human involvement, all it takes is several mouse clicks and a few key strokes from the investor.

In many cases, investing in ICOs greatly benefited both parties involved in the transaction; projects raised capital to improve their technologies and investors received an asset that would potentially appreciate in value. Investment in ICOs does (did) not require much capital for participation, had no regulations that excluded individuals, and allowed for a mostly fair opportunity for all to invest when sales were opened. It must be mentioned that there are cases where fake ICOs were perpetrated to scam investors out of money. With a little due diligence scams are easily avoidable and investors can protect themselves. ICO investing was useful, accessible, and fair.

Things changed.

2016 and 2017 were great years for investing in cryptocurrencies and ICOs. In the waning weeks of 2017, the markets went absolutely parabolic and crypto millionaires were born overnight. As money flowed into the crypto space, the supply of ICO investors and investment capital skyrocketed. With the influx of investment capital into the market, the teams of ICOs began to get, simply put, greedy.

Sadly, ICOs have begun to mirror more traditional methods for raising capital. Many of the more appealing projects are assigning a large majority of their ICO total token allocation to private funding rounds and pre-sales rather than public crowdsales. To be able to participate in a private or pre-sale you must have far more capital than was once considered acceptable for an ICO and/or you must be able to “contribute” to the project. To qualify as a “contributor” you must be able to add technical expertise (coding) or be able to generate massive amounts of hype around the project (think Youtubers or higher profile twitter personalities.)

A very recent example is the Quarkchain ICO. Quarkchain allocated 20% of their total token supply for their ICO (projects offering such small percentages of their total token supply during their ICO raises a totally different issue altogether, we will explore that in another article) Out of the 20% available for ICO, 80% of these tokens were allocated to private and pre-sale participants. A mere 20% of the tokens being sold at ICO were available for the general crowdsale portion of their offering. In this example, we can see that Quarkchain turned the proverbial table on its community; they sold out to high profile influencers as well as powerful and wealthy investment groups and individuals.

A far more egregious example is the Fantom project. Fantom’s fundraising goal was $40,000,000 for the sale of 1,270,000,000 tokens. In Fantom’s private and pre-sale they raised about $38,000,000, leaving only $2,000,000 (5%) of the total tokens being sold for regular investors. This is a slap in the face to the community that have supported them and built the hype around their project.

The other downside to the new model of hosting private and pre-sale rounds is that tokens are generally sold at a steep discount during earlier funding rounds. Investors who participate in earlier rounds of the ICO receive a substantial discount, or bonus amount of tokens, as compared to the regular crowdsale. There are examples where the private sale price for a token is $.01 and a crowdsale price is $.09; private sale investors were positioned to make a 9x their investment for simply gaining access to the private sale.

This tiered pricing model is particularly unfortunate for regular crowdsale investors. By the time tokens make their way to exchanges at crowdsale prices, the investors who participated in private/pre-sale rounds will have realized substantial gains and will dump their tokens on exchanges above or equal to crowdsale prices for a considerable profit. This is generally the reason why we see ICO prices plummet immediately upon hitting exchanges.

It is worth noting that a way to make the tiered pricing ICO model more equitable for all investors is to lock up tokens for an extended period of time — thirty to sixty days will not cut it. Make no mistake, a token lockup will have negative implications for token price at a later date once the token lockup period expires. It is reasonable to think that investors would immediately take profits and sell their tokens once the lockup period expires. In addition to selling pressure, the market supply is flooded by the tokens that were previously sidelined and out of circulation.

The point is this: the large increase in private and pre-sale ICO allocations is a major step backward for the everyday cryptocurrency investor. Fair and democratic ICO crowdsales seems to be going the way of the dodo bird. Sadly, projects have altered their ICO structures such that they resemble more traditional capital raising methods that favor institutions and promoters. The teams running these projects do not hesitate to use the guise of an ICO to build much needed interest and buzz around a project, while simultaneously sidestepping the regulation and scrutiny that comes with traditional capital funding methods.

Teams that host ICOs must remember that everyday, small cap, investors were the driving force behind the success of the ICO. The individual investor was the one who made ICOs work in the first place and drew interest into this niche investment space. The ICO gave back the freedom of investment to the average person. This freedom will no longer exist so long as ICOs sell a majority of their tokens in private and pre-sale to larger institutional investors, influences, or other insiders.

Alas, I have not answered the question posed in the title of this article. After all, who is really is killing the ICO? It is not the scammers or hackers. It is not the government regulators or big banks. It is not Warren Buffet, Jamie Dimon, or Senator Sherman. The real culprits are not who you think they are. Ironically, the killers are the entities who benefit most from the ICO: the project teams.