What is an ICO?
An Initial Coin Offering or ICO is a way of crowdfunding using cryptocurrency. It is normally a good source of capital for companies that are just starting up. In an ICO, a new cryptocurrency or token is released in exchange for other popular cryptos (BTC, LTC or ETH) or fiat (money such as dollars).
The goal of this mass token release is to generate funds for a particular project or business venture where the token has a purpose.
Nowadays, ICO tokens are steadily becoming the IPO of the future as they allow both large investors and the general public to have early access. A stock is almost impossible to purchase before it arrives on an exchange.
An ICO is capable of providing the same level of access to anyone who wishes to invest in it before a token is listed on an exchange.
Here are a few general ICO characteristics. Keep in mind that they may be different and depend on each cryptocurrency project structure.
– Most ICOs make a specific amount of coins or tokens available during the token sale period.
– Having tokens does not always mean the investor has the right to cast a vote on which direction the project should take. An investor’s rights are firmly rooted within the Initial Coin Offering structure though in general, the investor may have some limited input throughout the lifespan of a project.
– ICO’s are considered to be concluded once tokens become tradable on exchanges.
– ICOs may have more than one round of fundraising with tokens which can increase in value until the date of release.
ICO vs IPO
Here are a few comparisons between an ICO versus IPO:
– IPO (initial public offering) launched companies are required to pay taxes, with investors paying additional tax gains. With ICOs, tax can be tricky and differ depending on local government laws.
– An IPO will only give company ownership depending on the number of shares purchased. An ICO will only give you rights to a particular project and not the company that is launching the project.
– In an IPO, the release of the financial data is done as per the rules of the exchange which took place during the IPO. For an ICO, the data can be by way of the blockchain or public or as stated in the whitepaper.
– Companies and stock exchanges listed by an IPO are normally heavy regulated whereas the ICOs are not.
– An IPO is generally a onetime sale which involves multiple intermediaries. An ICO can have more than one round of fundraising very few or no intermediaries.
– IPO companies have a centralized method of the decision-making process with the board and CEO is active in the daily running of the business. In some ICO companies, the decision-making process is decentralized thereby providing an investor with a position in material decision-making.
Here is a video with more information.
History of Initial Coin Offerings
One of the first cryptocurrency that was heavily distributed by an ICO was Ripple.
In 2013 Ripple labs began developing the payment system referred to as Ripple and created approximately 100 billion XRP tokens.
The company then went on to sell these tokens to acquire funds for development of the Ripple platform. Later in 2013, Mastercoin began working on a project that wanted to create a new layer on top of Bitcoin so as to initiate smart contracts and turn Bitcoin transactions into tokens.
The developer of this project then went on to sell millions of Mastercoin tokens and generated around one million US dollars.
Several other cryptocurrencies then went on to gain funds through initial coin offerings. Lisk is one of these companies which managed to sell its coins for around $5 million in early 2016.
However, the most prominent company known to have benefited greatly from an ICO is Ethereum. In 2014, the Ethereum foundation managed to sell a significant amount of ETH.
The company received almost $20 million in funding, making it one of the biggest crowdfunded projects ever seen.
Find out more about the history of Ethereum here:
Legality of ICO
With ICOs the state of legality is mostly undefined. The token is not sold as a financial asset but as a digital good. Therefore, most jurisdictions find it difficult to regulate the funding in an ICO.
This makes the legality behind initial coin offerings often easy, paperless and complicated.
However, some jurisdictions are fully aware of ICOs and will regulate them similarly to the scale of securities and shares. The implosion of the Decentralized Autonomous Organization made regulators more aware of ICOs.
Some parts of the world do not allow their residents to invest in ICOs. If you are able to invest in them, you can find out how to determine the top ICO to invest in 2018 here.