An ICO (Initial Coin Offering) is to the crypto industry what an IPO (Initial Public Offering) is to public sector corporations. In other words, it’s an activity to raise capital in the Blockchain and cryptocurrency environment. Any business that seeks to raise money to develop a new crypto coin, service, or app can launch an ICO to get the money together.
Keep in mind, however, that the comparison isn’t like-for-like. Both capital-raising approaches have their differences. For instance, startups mainly announce ICOs to raise funds for their planned crypto-related projects. Interested investors can put their money into the ICO and receive a new company-issued crypto token or coin.
This token is likely to have some utility with regard to the product or service being offered by the company. On the other hand, it could simply represent an investor’s stake in the entity or that particular crypto project!
The biggest advantage of an ICO is the elimination of intermediaries from the fund-raising procedure. Through it, companies can build direct connections with the investors. In this way, both parties can easily work together and keep their interests aligned.
Types of ICOs
Initial coin offerings have the following two types.
Public ICO
As might be evident from the name, public ICOs target the general public. They’re a form of crowdfunding mechanism in which anyone can put their money in and become an investor. However, because of regulatory issues, private ICOs are emerging as a more viable alternative.
The popularity of ICOs has skyrocketed due to the rise of Blockchain and crypto trading. For context, about $7 billion were raised in 2017 through ICOs. This figure nearly doubled one year later. To date, the largest ICO has been carried out by Telegram, a UK-registered instant messaging service provider. Back in 2018, the company raised $1.7 billion in a private coin offering.
Private ICO
Unlike a public ICO, private coin offering events are normally restricted to a specific number of investors. No one else can join the process. Participants in a private ICO typically include individuals of high net worth, corporations, and financial institutions among others. They are referred to as “accredited investors.” Moreover, the ICO-launching company can set a minimum investment requirement at its discretion.
How Does An ICO Work?
When an organization wants to launch an ICO to raise funds for its crypto-related project, the first step is to figure out the structure. There are different ways to structure an ICO. These are discussed below.
Static Price & Static Supply
In this structure, the company can set a particular funding limit or goal. This means that every token bought during the ICO has a set price. There’s also a fixed supply of tokens for the entire capital-raising process.
Dynamic Price & Static Supply
Some ICO structures have a dynamic funding goal but the supply of tokens is fixed. As a result, the amount raised during the event will determine the price of every token.
Dynamic Supply & Static Price
In this type of ICO structure, the price is fixed but the token supply can vary. This means that the supply of tokens is determined by the amount of money received for them.
ICO White Paper
An ICO white paper is a document detailing important information about the coin offering. It is for the benefit of potential investors and is usually accessible through a new website dedicated to the crypto token.
Following are some useful project details covered in an ICO white paper.
- What is the project all about?
- What needs the project would address after its completion and launch?
- How much money needs to be pumped into the project.
- How many virtual tokens can the founders keep for themselves?
- Which currencies are acceptable as a form of payment?
- What will be the duration of the ICO campaign?
The ICO-launching company releases this white paper as part of its ICO campaign, which aims to entice investors, crypto enthusiasts, and supporters of that particular project to purchase some of the tokens.
You can use digital and fiat currency to buy the coins. Paying in other cryptocurrencies like Bitcoin and Ethereum is also becoming common. The newly issued coins tend to be similar to the stock bundles sold during an IPO.
If the amount raised during an ICO is less than the minimum limit set by the company, all the money can be returned to the investors. As a result of not reaching the pre-set funding goal, the ICO would be declared unsuccessful. In case all funding requirements have been met within the specified duration, the capital raised can be spent in pursuit of the project’s targets.
Pros & Cons of an ICO
Crypto token generation is usually facilitated through online services. This makes launching an ICO quite easy. The organizers can generate the coins in accordance with the terms of the ICO and then transfer them to the investors who’ve come onboard. However, since the SEC or any other authority doesn’t regulate ICOs, the money lost due to possible incompetence or fraud might never be traced or recovered.
Early ICO investors usually expect the value of the new tokens to increase significantly after the launch of the cryptocurrency. This is one of the biggest advantages of an ICO: the potential for extremely high returns on your investment!
On the flip side, the legal status of digital assets like cryptocurrencies is still not guaranteed. Despite influential entrepreneurs like Tesla CEO Elon Musk supporting cryptocurrency through their actions and public statements, there’s still some way to go before cryptocurrency can become legal tender.
In 2017, the People’s Bank of China banned ICOs in the country, vehemently criticizing them as being bad for financial and economic stability. Four years later, the Chinese government put a blanket ban on crypto mining, declaring all transactions illegal.
Final Words: ICO Regulations
Since ICOs are a recent phenomenon, regulatory authorities across the globe are still not ready for a game-changing new fundraising model with the potential to upset the established order. Besides, different countries have varying approaches when it comes to regulating ICOs. For instance, while the likes of China and South Korea have banned ICOs, many European nations, along with the US and Canada, are actively working on developing a robust ICO regulatory framework.
Furthermore, countries like Australia, Hong Kong, New Zealand, and the UAE (United Arab Emirates) already have detailed rules and laws governing the conduct of ICOs. Keep following The Crypto World for more engaging and unique content from the crypto industry.
