In the digital world everything is different – conventional is questioned, not sworn by. Everything happens faster, cheaper, more democratic. Even the way capital is made is challenged.
Essentially ICOs (initial coin offerings) are crowdfunding campaigns for cryptocurrency startups, willing to auction a set of significant batch of initial coins to their community and investors. They offer the opportunity to interested parties to purchase some of the distributed cryptocoins with fiat money or digital currency. The virtual coins are referred to as tokens that in reality resemble a share of the return on the platform in the form of cryptographically guaranteed equity, similar to the shares offered during an IPO (initial public offering).
Usually investors hope that the value of the coins will go up like it happened with the current top two cryptocurrencies on Coinmarketcap. ICOs can provide instant liquidity, require less paper work to be processed and as a result rise money faster than IPOs. They have not been bound by regulation until recently and can fund the company early in its life-cycle.
“Early-stage blockchain entrepreneurs have already raised more money via ICOs than venture capital (VC) this year, and VCs, seeing the writing on the wall, are beginning to disrupt themselves by tokenizing their own fundrising rounds.” (Forbes, 2017)
ICOs are the best way to fund a business idea based on blockchain and cryptocurrency. However if the ICO is unsuccessful and the minimum funds required by the company are not collected, its supporters get back their investments. Successful ICOs on the other hand help the startup to boost its business and achieve its goals.
“But this crowdfunding method raises a lot of questions, starting with: Is a token sold via an ICO a security? Additionally, the ease of raising gobs of money based on a white paper peppered with the word “blockchain” or “token” has led to numerous scams, and many ill-conceived projects have raised a lot more money than they would have from seasoned venture capitalists” (Forbes, 2017)
How is an IPO different?
In its essence, an IPO has the goal to offer a company’s stock to the public for the first time. Companies that “go public” do so in order to raise money that will be later invested in the business. As a result the company expands its business operations.
By purchasing shares in an IPO the interested parties actually loan money to the business. As the value of the purchased shares increases or decreases, investors may gain or loose money.
Because there is no historical data that could predict its future performance, IPOs can be risky for investors. The individual investor cannot anticipate how the stock will perform on its initial day of trading or short-term. The outcome of an IPO therefore is to a certain extent a gamble.
Successful IPOs are known to make millionaires over night. Many examples can be provided in which the initial price for a share of a Company has started at one cent and reached up to a tremendous value. Everyone who has bought into the pre-IPO phase and have been an investor from the very beginning, have taken the ultimate benefits of a successful IPO.
Contrary to ICOs, not everyone is allowed to participate in an IPO. Only a small group of people that can prove to have a certain amount of annual income are usually welcomed. It is said that such an obligatory condition protects the people who are part of the IPO.
On the other hand, companies that go public have an exclusive group of investors during their pre-IPO stage thus giving them a definite advantage to invest as much as possible. This way private companies give the chance to a selected group of affluent people to become richer and eliminate the opportunity for a wider part of the society to participate in the IPO.
So, an ICO is very similar to an IPO. But there is one major difference- anybody, anywhere in the world regardless of social status or income can participate in the ICO but not in an IPO. The ICO is therefore called a “game changer”, transforming the finance sector as we know it.
Want to Hold An ICO? CoinList Makes It Easy And Legal (Forbes, 2017)
SOURCE: OneCoin Ltd.