What is private sale? What is its role in the crypto market and what risks come with participating in a Private sale? Let’s find out through this article.
What is a Private Sale?
A private sale is the first fundraising stage of a crypto project, where tokens are sold privately to a select group of investors such as venture capital funds, financial institutions, or high-net-worth individuals.
This is a closed stage, with token prices more favorable than public rounds, but it comes with binding conditions such as a lock-up period and a vesting schedule.
The goal of a private sale is to raise initial capital to develop the project, while also building strategic relationships with major investors.
Key features of a private sale:
- Discounted price: Tokens are usually sold at a much lower price than the public listing price, giving large investors the opportunity for high profits.
- Limited participation: Only for investors with strong financial resources or strategic partners.
- Binding terms: Investors must comply with conditions such as a token lock-up period to limit sell-offs after the project launch.
How to Participate in a Private Sale
Participating in a private sale in the crypto space is not easy for the average investor, as it’s typically reserved for select individuals and comes with various requirements. Here’s a detailed guide on how to participate, who is eligible, the necessary capital, and the different rounds within a private sale.
Who Can Participate in a Private Sale?
Private sales are not open to everyone but are reserved for a select group of investors, including:
- Institutional Investors
- Venture Capital (VC): Venture capital funds specializing in supporting technology projects. Examples: a16z, Pantera Capital.
- Hedge funds: Hedge funds focused on cryptocurrency investments, such as Three Arrows Capital.
- Individual Investors
- Angel Investors: Wealthy individuals or those with direct relationships with the founding team.
- Accredited Investors: Certified individual investors (typically requiring a net worth of $1 million or more).
- Strategic Partners
- Technology Companies: Companies seeking long-term collaboration, providing technical solutions, or support services.
- Cryptocurrency Exchanges: Major exchanges like Binance or Coinbase participate to support token listing.
Types of Private Sale Rounds
Private sales are often divided into smaller rounds, each round for different audiences with separate prices and conditions.
Private sales can be divided into smaller rounds with different goals and target audiences:
Pre-Seed Round
The pre-seed round is the first stage of a private sale, typically aimed at raising capital for idea exploration and team formation. Funds raised in this round are used to create essential documents like whitepapers or to determine project feasibility. Participants are usually close investors like friends, family, or angel investors.
However, because the project is still in the idea stage, the investment risk in this round is the highest. The token lock-up period typically lasts from 1 to 5 years to ensure investor commitment to the project’s long-term success. This is also the stage where the token price is the lowest throughout the fundraising process.
Seed Private Sale
The seed private sale focuses on raising capital to develop an MVP (Minimum Viable Product) or a product prototype. The project uses this capital to expand the team, conduct market research, and build a foundation for subsequent funding rounds. Participants are usually experienced venture capital funds and angel investors.
The minimum investment in this round is higher than in the pre-seed round, ranging from $50,000 to $250,000, depending on the project’s scale and ambition. The token lock-up period typically lasts from 6 months to 2 years, along with a vesting schedule to prevent sell-offs. Although the token price in the seed private sale is lower than in later rounds, it is still slightly higher than in the pre-seed round to reflect the project’s progress.
Strategic Private Sale
The strategic private sale focuses not only on raising capital but also on building strategic partnerships with key organizations. Partners participating in this round often provide not only capital but also technical support, marketing expertise, or ecosystem expansion capabilities. The main goal of this round is to prepare for the token listing and increase project awareness.
Participants include major investment funds, technology companies, and reputable crypto exchanges. Investment conditions in this round require a minimum capital commitment ranging from $250,000 to millions of dollars, suitable for institutional investors or partners with significant resources. The token price in this round is higher than in the seed private sale but still significantly lower than in the Public Sale. The token lock-up period and vesting schedule are also designed to be flexible to accommodate strategic partners.
Conditions in a Private Sale
Token Lock-Up Period
A token lock-up is an agreement between the project and investors in a private sale that restricts the trading or transfer of tokens purchased during this period for a specific duration. This is a crucial mechanism to prevent large-scale sell-offs, also known as “dumping,” after the token is listed on exchanges, protecting the project’s value and stability.
Typical lock-up periods range from 6 months to 2 years, depending on the policy of each project.
In private sales, token lock-ups are often implemented to ensure that early investors are committed to the project’s long-term success rather than seeking short-term gains.
Vesting Schedule
After the lock-up period ends, tokens are gradually released in tranches. For example:
- 10% of tokens are released immediately after the lock-up period.
- The remaining tokens are released monthly over 12 to 24 months.
Read more: What are Token Unlocks & Vesting? Top 3 tools to track token unlock schedules.
Legal Agreements
In private sale rounds, investors are required to sign legal agreements to clearly define the rights and obligations of both parties. One common agreement is the SAFT (Simple Agreement for Future Tokens), where investors agree to receive tokens in the future according to the conditions set by the project.
This agreement protects the interests of both investors and the project, while ensuring that investors fully understand the risks and terms of participation, including the lock-up period and vesting schedule.
Minimum Capital
Private sales are not open to all investors and often have minimum financial requirements depending on the participating entities. For individual investors, the minimum capital typically ranges from $10,000 to $50,000, depending on the project’s scale and strategy.
For large funds or institutional investors, the requirements are usually much higher, potentially ranging from $100,000 to millions of dollars. This ensures that only investors with strong financial capabilities can participate in this high-risk, high-reward phase
Discounted Token Price
One of the most attractive aspects of private sales is the discounted token price. The token price in this round is often 50-70% lower than the expected public listing price during the Public Sale.
This discounted price is a reward for investors willing to take on early risks and commit to the project’s long-term success. However, this benefit comes with certain conditions, such as token lock-up periods and vesting schedules, to prevent sell-offs that could devalue the token immediately after listing.
How to Know if You Should Participate in a Private Sale “Deal”?
Private Sale Deals Reaching Retail Investors
Private sale deals that reach retail investors are usually opportunities to buy tokens in the early stages of a cryptocurrency project but don’t require large investments like those for venture capital funds or institutional investors.
Where to Find Private Sale Deals?
These deals are often:
- Distributed through intermediaries: Individuals who have a direct relationship with the project team or participate as major investors, then reallocate the opportunity to the smaller community.
- Focused on small communities: Crypto communities on Telegram, Discord, or X often organize groups to pool capital from many small investors to participate in private sale rounds. However, the risk level of these groups is extremely high.
- Launchpads: Platforms designed to help crypto projects access capital from the community through token sales such as private sales, IDOs, or IEOs. Some launchpads include Binance Launchpad, DAO Maker, Starship Launchpad, etc.
Scam Risks in These Deals
Private sales, especially when reaching retail investors, offer many opportunities but also carry serious scam risks. The lack of transparency in the organization, along with the participation of unreliable intermediaries, creates opportunities for various forms of scams to emerge.
Ghost Projects (Rug Pulls):
Intermediaries or the project’s founding team promote an idea that is not real or has no actual product. After receiving funds from investors, they disappear with the capital. This is a common form of scam in the crypto market.
- No detailed whitepaper or reliable technical documentation.
- Anonymous team or no clear public information.
- Unreasonable tokenomics, with most tokens concentrated in the founding team or major investors.
Brokerage Fraud:
Intermediaries organize deals to pool capital from many small investors but do not transfer the funds to the actual project. They may forge documents or use information impersonating the project team to build trust.
- No requirement to sign legal agreements like SAFTs.
- Request to send funds directly to a personal wallet instead of the official project wallet.
- No proof of transactions or official announcements from the project.
Weak or Non-Transparent Projects:
Some projects do exist but have no development potential. Intermediaries or the promotion team often exaggerate benefits to attract investment, but the project cannot implement the committed plan.
- Unclear or overly ambitious development roadmap compared to the project’s resources.
- No disclosure of smart contracts or capital receiving wallet addresses.
- Non-existent product.
Token Lock-Up Issues:
After the tokens are issued, investors may not receive tokens on time due to intermediaries or the team not distributing them as promised. In some cases, the lock-up period is not implemented, leading to sell-offs or loss of value.
- No clear contract regarding the token lock-up period or release schedule.
- No wallet address provided to track tokens.
Axie Infinity, one of the leading blockchain games, has made significant changes to its tokenomics structure to maintain economic balance and ensure the sustainability of its ecosystem.
Read more: Axie Changes Tokenomics – The Foretold End of Play-to-Earn Games?
Advantages and Disadvantages of Private Sales
Advantages
One of the most significant benefits of private sales is the ability to raise substantial capital at a lower cost.
This stage attracts large investment funds and strategic investors, providing essential financial resources for product development, team expansion, and marketing initiatives.
Moreover, the participation of reputable investors in private sales helps projects build strong credibility, attracting community interest and other investors. Additionally, private sales offer opportunities to establish long-term strategic partnerships that provide not only financial support but also technical expertise, market development, and user network expansion.
For investors, private sales offer the advantage of acquiring tokens at discounted prices, optimizing potential profits after the token listing.
Disadvantages
However, private sales also come with significant limitations and risks. One major drawback is the potential concentration of token ownership in the hands of a few large investors. This can lead to price manipulation when these investors dump their tokens after the lock-up period.
Furthermore, most tokens in private sales are subject to lock-up periods, preventing investors from trading their tokens for an extended time, even if the token value increases significantly.
For smaller investors, this is a major obstacle, as they cannot capitalize on short-term profit opportunities. Another disadvantage is the liquidity risk. If the project fails or doesn’t gain traction, the tokens may lose value or even lack liquidity for trading.
Transparency is also a significant challenge. Some projects exploit private sales to raise capital and then disappear, causing substantial losses for investors. This often happens with projects that lack a clear product or commitment to a development roadmap.
For the community, private sales can be perceived as unfair due to the preferential treatment given to large investors, leading to higher token prices in later public rounds and reducing opportunities for smaller investors.
Read more about: Public Sale – Opportunities as Blockchains Become More Open.
