INITIAL COIN OFFERINGS (ICO’S)
As a by-product of the incredible boom in cryptocurrencies a new principle of raising money for companies and projects was born in the creation of ICO’s. An ICO is not dissimilar to an Initial Public Offering (IPO) which is simply a method of raising capital except instead of selling shares for investment in a company an ICO is offering crypto coins for investment.
Like cryptocurrencies themselves ICO’s are unregulated and have been used to bypass the stringent and regulated process required to raise money for new cryptocurrency ventures. It is generally used by a cryptocurrency start-up who wish to raise funds through an ICO. Nearly every single ICO will be accompanied by a whitepaper which is a document that explains what the project is about, what the project aims to achieve, how much money is needed, what type of money is accepted, how the new coins (tokens) are distributed, how investors can buy the coins and general details about the company wishing to raise money through an ICO. Coins in this sense are generally referred to as tokens which bear some resemblance to shares of a company sold to investors in an IPO.
The aim is to raise money for a project and in this way if the money raised through the ICO does not meet the required minimum investment of the firm to undertake the project it has failed and money is returned to investors. Likewise if the funds raised meets the company’s expectations then the project will go ahead and be used for this purpose, bearing in mind that all ICO’s have an investment window or timeframe i.e. they are offered for a limited time only.
Some ICO’s may offer a pre-sale, whereby early investors are rewarded for their early investment in the project at a discounted price etc. Investors in ICO’s generally invest on the basis that the plan or project becomes successful which to them will translate to a higher cryptocoin value than they purchased it for before the project started. Due to the popularity of ICO’s investor have to be wary when investing, as whilst many may be legitimate fund raising exercises for genuine projects some have been scams and fraudsters made off with the money.
In summary ICO’s simply swap a new cryptocoin for money investment and the investor wants to see the value of the coin increase in value as the project develops into a commercially viable business. Whilst there are many similarities with IPO’s, ICO’s are also similar to crowdfunding with the main differences being an IPO deals with investors but ICO’s deals with supporters who are of course keen to invest in a new project, similar to crowdfunding activities. Since an ICO sits in the middle of both types of activities in an IPO and crowdfunding they are often dubbed crowdsales.