Contents
What is ICO?
Difference between ICO and IEO (Initial Exchange Offering)
Difference between ICO and STO (Securities Token Offering)
How does the ICO process work?
Who can do ICO?
What are the legal regulations regarding ICOs?
What kind of risks do ICOs involve?
latest ideas
What is ICO?
Initial Coin Offering (or ICO) is a method used by teams in the cryptocurrency world to raise funds for their projects. In an ICO, teams create blockchain-based tokens to sell to early backers. This serves as a community funding phase – users purchase tokens that they can use (immediately or later) and raise funds to enable development on the project.
This application became popular in 2014 when it was used for the development of Ethereum. It has since been used by hundreds of startups (especially in 2017) with varying success rates. Although the name suggests Initial Public Offering (IPO), the two offerings are actually completely different methods of raising funds.
IPOs usually consist of well-known companies selling partial ownership of company shares to raise funds. In contrast, ICOs are a fundraising mechanism that allows companies to obtain funds in the early stages of their projects. When ICO investors buy tokens, they do not buy company shares.
ICOs can be an alternative to traditional funding for technology startups. New entrepreneurs often have trouble raising capital without an existing working product. In the blockchain world, well-known companies rarely choose to invest solely based on positive features on a white paper. Moreover, the lack of cryptocurrency regulations prevents many people from considering blockchain startups.
But this practice is not only used by new startups. Well-known companies also sometimes choose to do reverse ICOs, which are very similar to standard ICOs in terms of implementation. In this case, the company has a product or service in place and issues a token to decentralize its ecosystem. Alternatively, an ICO can be held to reach a wider audience of investors and raise capital for a new blockchain-based product.
Difference between ICO and IEO (Initial Exchange Offering)
Initial Coin Offerings and Initial Exchange Offerings are similar in many ways. The main difference between them is that IEOs are not carried out entirely by the project team, but a cryptocurrency exchange is also involved in the process.
Exchanges partner with the team so users can purchase tokens directly on the platform. This process can be beneficial for all participants involved. When a reputable exchange supports an IEO, users expect the project to have been thoroughly vetted. The team behind the IEO manages to reach a larger user base, and the exchange profits from the success of the project.
Difference between ICO and STO (Securities Token Offering)
Security Token Offerings were once called “new ICOs”. From a technological perspective, these two types of offerings are exactly the same, meaning tokens are created and distributed in the same way. From a legal perspective, the two are completely different from each other.
Due to some legal uncertainty, there is no consensus on how regulators should evaluate ICOs (more on this below). As a result, the sector does not yet have meaningful legal regulation.
Some companies choose to do an STO to offer securities in token form. This also helps companies deal with uncertainties. The token issuing company registers the offering as a security offering with the relevant government agency, so it has the same obligations as traditional securities.
How does the ICO process work?
ICO can take many different forms. Sometimes, the ICO team may have a working blockchain that they will continue to develop in the coming months and years. In this case, users can purchase tokens that will be sent to their on-chain addresses.
Alternatively, the blockchain may not be available yet, in which case the tokens are issued on another well-known blockchain (e.g. Ethereum). Once the new chain goes live, token holders can exchange their tokens for fresh tokens issued on this new blockchain.
But the most common practice is to issue tokens on a chain compatible with smart contracts. Again, this application is mostly done on Ethereum and many applications use the ERC-20 token standard. It is estimated that there are over 200,000 different Ethereum tokens today, although not all of them originate from ICOs.
There are other chains that can be used besides Ethereum. Waves, NEO, NEM and Stellar are popular examples. Given that these protocols are so flexible, many organizations prefer to keep their tokens on these blockchains and build on existing foundations rather than moving them later. This approach ensures that you can benefit from the network effects of a well-known ecosystem and that developers have access to tried and tested tools.
The ICO is announced a certain time in advance and the rules for how the ICO will be conducted are determined. These rules may set a time frame for the ICO, set an upper limit for tokens to be sold, or a combination of the two. There may also be a whitelist that users must sign in advance.
Users then send funds to a designated address. Bitcoin and Ethereum are generally accepted due to their widespread use. Buyers provide an address to send the tokens to, or the tokens are automatically sent to the address where the payment was made.
Who can do ICO?
The technology to create and distribute tokens is easy to access. But in practice there are many legal issues to consider before conducting an ICO.
Generally speaking, the cryptocurrency world is weak in terms of regulation and there are important questions that remain unanswered. Some countries ban ICOs outright, but even the most crypto-friendly governments lack clear regulations. Therefore, it is very important to be informed about the laws of your country before conducting an ICO.
What are the legal regulations regarding ICOs?
It's not easy to give an answer that works for all projects because there are so many variables to consider. Regulations vary from country to country, and the unique differences of each project can affect how government agencies evaluate it.
It should not be thought that the lack of legal regulations in some places gives permission to raise funds from the community by conducting an ICO for a project. Therefore, it is important to seek professional legal advice before opting for this type of community funding.
There have been examples where teams that raised funds had to pay fines after it was later determined that they had made a securities offering. If authorities decide that a token is a security, the company issuing the token is subject to the same strict practices that apply to traditional assets in this class. The US Securities and Exchange Commission (SEC) provides useful information on this.
Regulatory development in the blockchain world is generally slow, especially as the technology advances much faster than the slow gears of the legal system. Still, many government agencies are evaluating the establishment of a more transparent framework for blockchain technology and cryptocurrencies.
While many blockchain enthusiasts are uneasy about government interference (which could impede development), the majority think controller protection is necessary. Unlike traditional financial classes, the ability for anyone anywhere in the world to participate creates some significant challenges.
What kind of risks do ICOs involve?
It is interesting that a new token can make a big profit. But not all coins are equal. As with any cryptocurrency investment, there is no guarantee that you will see a positive return on investment (ROI).
It is difficult to determine whether a project is feasible because there are many factors that need to be evaluated. Those who will invest are required to exercise due diligence and conduct comprehensive research on the tokens in question. This process should include an in-depth fundamental analysis. Listed below are some examples of questions that may be asked, although not all are included:
Is this concept applicable? What problem does it solve?
How is the supply shared?
Does the project need a token/blockchain or can it actually run without one?
Is the team reliable? Do you have the skills to bring this project to life?
The most important rule is to never invest more than you can afford to lose. Cryptocurrency markets are extremely volatile and there is a significant risk that the value of your savings may decrease rapidly.
latest ideas
Initial Coin Offerings are an extremely effective way for early-stage projects to raise funds. Following the success of Ethereum's Initial Coin Offering in 2014, many organizations have managed to raise capital to develop new protocols and ecosystems.
But buyers need to be careful about what they invest in. There is no guarantee that you will make a profit. Considering that the cryptocurrency world is still very new, such investments involve high risk and there is little way to protect against the risk that the project fails to deliver a usable product.
