What is an ICO?
An Initial Coin Offering, or ICO, is a way for project teams to raise funds in the cryptocurrency space. The project team issues blockchain-based tokens for sale to early supporters via ICO. This serves as crowdfunding, users receive tokens that they can use (immediately or in the future), and the project team finances their development.
ICOs became popular in 2014 when they were used to raise funds for Ethereum development. Since then, hundreds of ventures have adopted ICOs (especially booming in 2017), with varying results. Although the name is similar to an Initial Public Offering (IPO), it is a fundamentally different method of raising funds.
An IPO is the sale of some of the shares owned by existing companies to raise funds. ICO, on the other hand, is a funding mechanism that companies use to raise funds in the early stages of a project. When ICO investors purchase tokens, they are not buying any ownership of the company.
ICOs can be an alternative to traditional funding methods for tech startups. New market entrants usually have a hard time securing funding because they don’t have a real product. In the blockchain space, existing companies rarely see the advantages of white papers and invest in projects. Moreover, the lack of cryptocurrency regulation discourages investing in blockchain startups.
Nevertheless, ICOs are not only used by startups. Existing businesses also often launch reverse ICOs, which are functionally very similar to regular ICOs. In this case, the company already owns the product or service and issues tokens to decentralize that ecosystem. In addition to this, companies host ICOs to include investors from a broader range of sectors, and may even raise funds for new blockchain-based products.
Comparison of ICO and IEO (initial exchange offering)
ICOs and Initial Exchange Offerings IEOs (Initial Exchange Offerings) are similar in many respects. The main difference is that the IEO is not hosted by the project team alone but in conjunction with a cryptocurrency exchange.
The team’s exchange partners allow users to purchase tokens directly from the platform. This can be beneficial to both parties involved. If a reputable exchange supports one IEO, users can expect that the project has gone through rigorous audits. The IEO’s team will have more external exposure opportunities, and the exchange will benefit from the success of the project.
Comparison of ICO and STO (Security Token Offering)
Security Token Offerings (STOs) were also known as “New ICOs”. From a technical point of view, they are identical, and tokens are created and distributed in the same way. However, from a legal point of view, the two are completely different.
Due to the ambiguity of the law, there is no consensus on how regulators will screen ICOs (discussed in more detail below). Therefore, no meaningful regulation has yet been found in the industry.
Some companies choose STOs as a way to pay out common shares in the form of tokens. It also allows companies to circumvent all uncertainty. Token issuers register their tokens with the relevant government agencies as security token offerings, which will be treated like traditional securities.
How does ICO work?
ICOs can take many forms. Sometimes there may be a working blockchain that the team hosting the ICO will continue to develop over the next few months or years. In this case, users can purchase tokens on that chain, which will be sent to the user’s address on that chain.
Of course, the blockchain may not have been launched, at which time tokens will be issued on an existing blockchain ( such as Ethereum ). When a new chain is activated, holders can swap their tokens for new ones issued on that blockchain.
However, the most common cause is the issuance of tokens on smart contract-capable chains. This is primarily done on Ethereum, and many applications use the ERC-20 token standard. Not all tokens originated in ICOs, but it is estimated that there are currently around 200,000 Ethereum tokens.
In addition to Ethereum, you can also use well-known chains such as Waves, NEO, NEO, and Stellar. Depending on how flexible the protocol is, many companies develop on the existing foundation rather than move to another chain. In this way, companies can take advantage of existing ecosystem networks, and developers can use tools they have tried and tested before.
The ICO announces certain rules on how to proceed in advance. This may be to outline the timeframe for the implementation of an ICO, to enforce a hard cap on the number of tokens sold, or both. There may also be whitelisting schemes in which participants must sign up in advance.
Users then transfer their funds to a specific address, usually using the popular Bitcoin and Ethereum. The buyer provides a new address to receive the tokens, otherwise, the tokens are automatically sent to the address where the payment was made.
Who can launch an ICO?
The accessibility of these technologies for generating and distributing tokens is easy. But realistically, there are many legal issues to consider before implementing an ICO.
Overall, there is a lack of regulatory guidance in the cryptocurrency space, and critical questions remain undecided. Some countries even completely ban ICOs, and even the most crypto-friendly places do not have clear laws in place. Therefore, it is essential to understand the laws of your country before considering an ICO.
What are the regulations related to ICO?
It’s hard to give a single answer to this because there are so many different things to consider. Different jurisdictions have different laws, and how government entities view them will create nuances for each project.
One thing to note is that the lack of regulation in some countries does not mean that projects are free to raise funds from the public through ICOs. Therefore, it is important to seek professional legal advice before adopting this form of crowdfunding.
Occasionally, regulators will sanction teams that have raised funds that appear to have provided security tokens in the future. If authorities find that a token is a security, issuers must comply with stringent laws that apply to these types of existing assets. The US Securities and Exchange Commission (SEC) has provided good insight in this area.
In general, the adoption of regulations in the blockchain space is slow, as the technology moves faster than the slow-moving judicial system. Today, many government authorities are still in discussions to provide a more transparent framework for blockchain technology and cryptocurrencies.
Several blockchain enthusiasts are wary of the possibility of government over-regulation (which could stifle development), and most recognize the need to protect investors. Contrary to the traditional realm of finance, the fact that anyone in the world can participate presents significant challenges.
What are the risks with an ICO?
New tokens that can deliver huge returns are definitely attractive. However, not all coins are the same. There is no guarantee that your return on investment (ROI) will always be positive in cryptocurrency investing.
Because there are so many factors to evaluate, it is difficult to determine if a project is feasible. Therefore, potential investors should diligently conduct extensive research on the tokens they are considering. These courses should include fundamental analysis. Below is a list of some questions, but not exhaustive.
- Is it a feasible idea? What problem do you want to solve?
- How is the supply allocated?
- Does the project need a blockchain? Or is it possible without it?
- Does the team have a good reputation? Do you have the capacity to make the project a reality?
The most important rule is to never invest more than you can afford to lose. The cryptocurrency market is extremely volatile and there is a risk that your tokens will plummet.
ICOs have been very effective as a way for several projects to raise funds at an early stage. After Ethereum’s ICO success in 2014, many companies have been able to raise funds to develop new protocols and ecosystems.
However, buyers should be careful with their investments. Because there is no guarantee that you will make a profit. Investing in the cryptocurrency space carries significant risks and offers little protection if a project fails to deliver or materialize.