While several factors conspire to slow down the growth and use of initial coin offerings (ICOs) as a fundraising option for blockchain-based businesses, more startups are turning to airdrops to distribute their tokens.

In 2017, startups around the globe raised over US$5 billion through ICOs. Also known as token crowd sales, ICOs have allowed startups to create tokens on a blockchain and sell them to the public to raise funding.

Startups who used this method have had to grapple with legal ramifications. Most jurisdictions, including the US and Australia, choose to treat ICO tokens as securities. This classification comes with legal requirements that can be difficult to abide by, especially given that the blockchain is global in nature.

Historically, token crowdsales have been used as an easier way for companies to raise capital, compared to seeking venture funding and angel investments. While social media networking sites—such as Facebook, Snapchat and Twitter, as well as Google and Mailchimp—have banned cryptocurrency-related ads and promoted content, indications remain that this way of sourcing capital will continue in popularity.

An airdrop, however, is an event where a startup issues tokens to the public without taking payment in return. For the participants, it could be ‘free money’ coming their way.

By airdropping instead, startups can hope to overcome the marketing and legal challenges that accompany ICOs. Here’s how airdrops work.

A marketing channel

Giving out tokens instead of selling them is an effective marketing strategy. A startup identifies recipients by collecting wallet addresses from existing blockchains such as Ethereum or Bitcoin.

If you are a recipient and see a new coin in your wallet, you are likely to research where it came from, giving visibility to the project behind it. You are more likely to receive airdropped tokens if you are an active Ethereum user, as most projects use that blockchain to create and distribute tokens.

As long as the token is ERC20-standard compliant, you can accept it through any Ethereum wallet, in particular MyEtherWallet, MetaMask or Mist. The easiest way to find out whether coins have been airdropped to an Ethereum public address to which you own access is to use the Ethereum blockchain browser Etherscan to search the address.

Of course, tokens that are delivered in such a way may be lost forever if owners of the address never check for any tokens sent to them. A project would likely count the lost coins as a cost of using the airdrop marketing strategy.

Another way such projects issue coins is by distributing them as rewards to those who follow the project on social media. It is common now for projects to create Telegram channels and issue tokens to anyone who joins.

This method of airdropping depends hugely on projects achieving visibility through word of mouth. Once a few people get coins, they organically spread the word, with the hope of being rewarded for their actions when more people join in to benefit from the drop. This expands the marketing reach of the project.

Getting around legal requirements

Airdropping also gives projects a means to sidestep legal requirements involved with issuing securities to the public. The US Securities and Exchange Commission (SEC) has declared tokens issued to raise capital to be securities, for all intents and purposes.

The Australian Securities and Investments Commission (ASIC) takes a similar view. They have stated that some ICOs could be considered financial products subject to the Corporations Act, which stipulates the process of raising capital through issuance of securities.

The line between utility tokens and securities is blurry, and what a startup may consider a utility token, the regulator may classify as a security. ASIC acknowledges that the decision to classify a token as a financial product depends on the token’s nature. The organization has explained that the mere fact that an issuing startup describes a token as a ‘utility’ doesn’t automatically exclude the token from being a security.

Method of fundraising

The question arises: When a project airdrops its token, how does it raise funds?

Some projects choose to drop only a portion of their tokens for marketing purposes, while selling the rest in an ICO. Others choose to issue all user tokens through an airdrop, while retaining a percentage to put toward the team budget.

The team will later sell these through an exchange after holders have begun trading them. This way their sale isn’t seen as a method for issuing securities. Instead the company is just another holder selling on the marketplace.

A few websites exist where you can track scheduled airdrops of tokens. These include AirdropAlert, Airdrop Tracker and CoinAirdrops.