What Is Hard Cap?

Hard cap is a term used to describe the predetermined maximum of capital that a project has in view to raise during a fundraising event such as an Initial Coin Offering (ICO).

ICOs provide a means for startups to do fundraising in a decentralized manner, allowing them to bypass traditional financial institutions and venture capitals. 

Once the maximum limit is reached in a fundraiser, the project will no longer accept any further investment, effectively capping the amount of funds that can be gathered. 

The hard cap plays the role of a financial boundary that represents the highest possible level of resources the project’s developers need to achieve their objectives. 

Key Things to Note About a Hard Cap

Some very distinct features of a hard cap are:

• A project’s developers usually set the hard cap of a project in the early stages of the project. Startups set a hard cap to control how much money they get and make sure they don’t oversell their tokens.

• Different startups set their hard caps in different ways. Some startups set their hard caps in fiat currency, while some others in cryptocurrency. For example. As a startup running a fundraising campaign, you may set your hard cap at $20 million or 20 million BTC. 

• During a fundraiser, if the hard cap is not arrived at, all the funds already gathered are returned to the investors. This is done because, if the funds needed to start the project aren’t arrived at, the project won’t be financially viable, so there is no need to hold onto the funds raised because it won’t be sufficient.

• Another thing to note about hard caps is that some project developers can use hard caps to increase the demand for their tokens. Some startups set a low hard cap just so a sense of scarcity will be created which will lead to an increase in demand for their tokens.

• Hard caps can also be a major red flag for investors. There are times when some startups set a hard cap that is either unreasonably high or seems too good to be true. This, most times, is a sign of a fraudulent project. So, as an investor, you should be careful when making such investments.

Why Hard Cap is Important in ICOs

There are various reasons why setting a hard cap is vital in ICOs.:

Realistic Goals

When a project sets a hard cap, it is usually an indicator that the project has realistic goals and that the team is not after more funds than is required to fund the project. Hard caps ensure that the project has a clear roadmap and achievable milestones and the team with the hard cap is accountable for achieving them.

Transparency

A startup project that has a hard cap provides transparency for the investors so that they can understand the project’s goals and objectives. It also helps the investors make a clear decision based on the information provided as to whether the project is worth investing in or not. 

If the hard cap is set too high, for some investors, this may mean that the project is too ambitious and that the team may be trying to take on more than they can handle.

Investor Protection

A hard cap provides a roadmap and thus, helps prevent investors from putting in too much of their funds in a project that may not be able to deliver the needed results. The hard cap also ensures that the team is not overfunded, which can lead to mismanagement of funds raised.

Token Value

A hard cap certainly has a significant impact on the value of the startup project’s token. If the hard cap set by the developers is too low, investors may think the project is not ambitious enough, and that the token may not have much value, thus not worth their time. 

On the flip side, if the hard cap is set to be too high, it may dilute the token’s value, again scaring off investors who were willing to invest.

Limited Supply

Setting a hard cap for a startup project ensures that the project has a limited token supply because it creates a sense of scarcity among investors. This will ultimately lead to an increase in the demand for the token which translates to an increase in the value of the token.

Startup Projects that Set Hard Caps

There are many projects that set hard caps when they were at the startup level, some of them were a success, others, not so much. Here are some examples of successful startup projects that set a hard cap:

1. Ethereum
2. Filecoin
3. Basic Attention Token (BAT)

Ethereum

Ethereum is one of the well-known blockchain platforms. As a startup, it set its target at $18 million in 2014. This was the predetermined height for the sale of its Ether tokens.

Filecoin

Filecoin is a decentralized storage network which is noted to have held one of the largest ICOs in the history of fundraising. This project set a hard cap to raise $200 million during its fundraiser and it stopped the fundraiser immediately after it reached that amount.

Basic Attention Token (BAT

Basic attention token (BAT) is a token that was designed to improve how efficient digital advertising is. It also set a hard cap during its fundraiser in 2017 and stopped receiving funds immediately after its hard cap was reached.