An initial coin offering (ICO) or initial currency offering, a type of crowdfunding using cryptocurrencies, is a means of raising capital. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. During the ICO, the project team sells digital tokens for crypto-currencies or fiat money to investors. Later, these coins can be used on the project platform as an internal currency or trade them on exchanges.
Its important to note that unlike an Initial Public Offering (IPO), investing in an ICO won't result in you having an ownership stake of the company you're giving money to. You're gambling that the currently worthless currency you pay for now will increase in worth later and make you money.
What is the purpose of ICO?
ICO is offered by a startup team when there is a need to raise funds for launch or develop the project. Usually, ICO is conducted in the early stage of projects implementation, before the creation their full-fledged infrastructure. The funds raised are used to finance the final stage of development, marketing, or are sent to special development funds to support projects in the long term.
What is the legal status of ICOs?
Nowadays, ICOs are neither legal nor illegal way of raising funds. ICOs' legal status, procedures and requirements for companies that are going to raise funds in this way are not defined in any country in the world. Moreover, it is also difficult to legally define the nature of the relations between participants of an ICO. As these relations are not financial relations as they are understood traditionally. At the same time, it is safe to say that ICO-process is based on the developers reputation and trust of users, potential investors.
What is the difference between ICO and IPO?
When a company aims to offer its shares to the general public, it conducts an IPO (Initial Public Offering). The ICO can work in a similar way: an investor gets share in the startup in the form of tokens. There are ICOs with another investment conditions: investing in an ICO won't result in you having an ownership stake of the company you're giving money to. You're gambling that the currently worthless currency you pay for now will increase in worth later and make you money.
At the same time ICO has similarities with crowdfunding: funds are usually collected to implement a certain idea, at a stage when the project does not have a finished product.
Unlike an Initial Coin Offering (ICO), an initial public offering (IPO) is governed by national legislation. For example, in the US for public offering of shares the company must be incorporated as a joint stock company and must be registered with the SEC (Securities and Exchange Commission). All this complicates the process of attracting investments into the project but provides certain guarantees to investors. In the case of ICO, the process of attracting investments is much easier, but users are not immune to scam of project failure.
What attracts investors to ICO?
By purchasing tokens on ICOs, investors primarily expect:
to earn extra income from their sale at a higher price in the future (a classic example is Ethereum, whose tokens cost less than one cent during the ICO in the summer of 2014, and today their price has risen to almost $ 400);
to use tokens exactly as intended — to receive the claimed services at a lower price.
What are the disadvantages of ICO?
Most ICOs are usually held in one round, and their chances of obtaining additional funding are rather modest. This can be seen as a potential risk if you look at the project in the long run.
But, perhaps, the biggest risk of participation in IСO is a scam, when developers of the project are aimed to collect user money. In addition, it cannot be ruled out that a project you invested may not survive to the stage of product appearance or disappoint you with its implementation.
What should you look for before investing in an ICO?
The abundance of different ICOs can embarrass even experienced investors. Therefore, first of all, it is necessary to carefully study the sale agreement (Token Sale Agreement). When reading this document, curious details may come up to the surface, which the organizers of the ICO may not have publicly announced. In addition, there are unspoken indicators of the conscientious intentions of the project:
Availability of all necessary agreements and rules published on the website as a public offer;
Ready working prototype;
Correctly made Project White Paper and the rest of the documentation;
The presence of escrow (a special conditional account, which takes into account property, documents or cash prior to the occurrence of certain circumstances or the performance of certain obligations);
The unblemished reputation of project developers.
What are the examples of the most successful ICO?
The success of ICO is a rather conventional thing. However, the total amount of money raised via crowdfunding is a generally accepted indicator. In this respect, leadership at the moment belongs to the Bancor project, which in June 2017 collected 396,720 ETH in less than three hours.
An example of another rapid crowdsale was an innovative browser Brave: the project managed to achieve a financial goal and raise $ 35 million in 30 seconds.
In May 2017, Storj ($ 30 million in less than a week) and Aragon ($ 25 million in 15 minutes) was added to the list of the most successful crowdsales.
ICO can be compared with crowdfunding, to be fair it is a completely new technology, however, it still means collective financing and it is used in cryptocurrency and blockchain industries.
What it is all about
Abbreviation ICO stands for Initial Coin Offering: company creates tokens, company’s target change them for cryptocurrencies (Bitcoin and Ethereum mostly) or fiat money. In the end, project investors becomes owners of the company, released tokens.
How to make your own ICO
You need big money to make anything live, and now you’re able to raise this money via running an ICO. Usually this long and undetermined route begins from creating a team, that is ready for hard work. Any expert will tell you, that team needs well thought out business-plan, including technical description and characteristics as well as business-model for achieving goals and source of income. In most cases beginning entrepreneurs can take already existing project as a basement, but sometimes it may not exist.
Next leap is an advertisement phase. It can be done on forums, in social networks, blogs or on the internet. Such ads help target audience to find your project or learn more about it. Only after these steps, your project’s full information can be revealed to your investors. This should include not only the quantity of your coins, but their price and benefits of your product as well.
Coin offering take place almost in the end, after what they are going to be sold to potential investors, and only then coins can be bought on stock exchanges. If the project is popular, investors get profit for every coin they’ve bought.
What ICO types are there
ICO differ from each other by how their tokens are estimated on the market, that way price formation are done during token sale.
The price is raising due to the quantity of investors
On the first phase the price is fixed on the lowest level. As the amount of investments in the project increase or its expiration date coming, the price of it getting more and more. A simple rule works here: those, who do their investment first have much bigger risk, however, they get more coins for the same price.
The price is getting lower and lower
In this case, the price is the highest at the beginning of token sale. And it's getting lower as auction finishes.
You can buy token with the same price on them, despite the factors below. After the sale ends, tokens become frozen for a certain period, what means that you can’t do anything with them, you aren’t able to sale or transfer your coins.
If the price of the token isn’t fix, then project collect investors funds, after what it organizes token sale and distributes them between depositors according to project’s foundation.
Methods of investing in ICO
There are just a few ways to take part in some ICO. The first one is to buy tokens indirectly via stock exchange. All tokens, that are distributed in ICO, are able to be bought or sold. In the other words, in case you can’t buy coins on the start, you can always do this using exchanges.
The second scenario may be interested for those, who want to buy project’s tokens at early stages. For example, directly during the official sale on the Ethereum platform. To get access to the project, only you need to have is a wallet and some money there. Next step is investing in ICO, sending your money to address of the team in trade for their tokens. You can pay for tokens anytime after the ICO starts, however, you will get your tokens as soon as ICO end.
How to identify fraud
As any other sort of investment, ICO is associated with risks. Experts say that you have to avoid projects
Whose teams keep its identity secret
Who has no deposition option on their wallet
And those, whose plans are unclear or unrealistic
By today there are some unspoken rules for developers. All stages of the project have to be clear for audience. If they don’t release some parts of the code, demo or beta versions of their product, but they do upload some videos or articles about their progress, in such case they may be swindlers.