ICO – Initial Coin Offerings (ICOs)
Nowadays, you can’t speak about the state of the blockchain industry without at least mentioning ICO or initial coin offerings (ICOs). They’re a way for new projects, startups, and companies to sell their underlying crypto tokens in exchange for investors’ money.
ICO Meaning and Definition
An initial coin offering or initial currency offering is a type of crowdfunding. However, it is for cryptocurrencies. In an ICO, a quantity of cryptocurrency is sold to speculators or investors. Sale of Cryptocurrencies is in the form of “tokens” (or “coins”). There is an exchange of legal tender or other cryptocurrencies for the offered tokens.
ICOs vs IPOs – How are ICOs different
Think of ICOs as Initial Public Offerings, but instead of investors purchasing shares of a company, they purchase the coin underlying a new project. ICOs are very different from equity. Having a new project’s coin doesn’t give you ownership of the project, but instead enable you to use the project when it becomes available. Thereby, by buying into an ICO, it shows that you are interested in this new project. For example, here are a couple famous ICOs:
- Bancor ICO raised $150 million
- Tezos ICO raised $200 million
- Filecoin ICO raised $253 million
Investing in ICOs
ICOs are permissionless and enable ANYONE to invest in a project that they feel will be successful. We put emphasis on the word ANYONE because of the open and public nature of these cryptocurrencies. And when you think of it, it’s pretty wild. From this tweet: “95% of Americans are not allowed by law to invest in start-ups. Only ‘accredited investors’ are entitled to do so, but you can buy lottery tickets all you want or go to Las Vegas to gamble” This shows that ICOs are leveling the playing field for investments. Normal people now can invest in any blockchain project they want to. And with so many new projects coming out, some with more potential than others, the community needs some way to support them. That’s where ICOs come in. As a comparison: In Q3’17, ICOs have raised $1.3B with 150 ICOs while seed/angel investing across all tech sectors has raised $1.4B across 1602 deals.
An ICO can be a source of capital for startup companies. ICOs allow startups to avoid regulatory compliance. And avoid intermediaries such as venture capitalists, banks and stock exchanges. Ethereum is (as of February 2018) the leading blockchain platform for ICOs with more than 80% market share.
Benefits and Risks in investing in ICOs –
To the issuer:
- Access to seed funding, faster and with fewer restrictions than via the venture capital route
- A base of participants to use and test the service
- No loss of equity in the project
- A faster funding process
- Uncertain regulation (possible future regulations, fines and penalties)
- Unstable investment (a sell-off by disgruntled users could affect the token price and the viability of the project)
- Little idea of who the token holders are
To the token holder:
- Access to an innovative service
- Possible gain through an increase in the token’s price
- Participation in a new concept, a role in developing a new technology
- No regulatory guidelines or protection
- Often incomplete information about underlying fundamentals of the offerings
- Little transparency on token holding structure
- No guarantee the project will get developed
What is an ICO PreSale or PreICO?
ICO Presale are also known as Pre-ICO. In Pre-ICOs, the token sale are run before the official crowdsale or ICO campaign goes live. That is, before the offerings are made available to the public. The fund-raising targets for Pre-ICOs are often lower as compared to that of the main ICO and tokens are usually sold cheaper.
Pre-ICOs ideally make use of separate smart contracts from the main ICO event. This is informed by the need to avoid a mixture of Pre-ICO funds with the main ICO to enable proper and easy account reconciliation and audit.
Some projects run Pre-ICOs as a way to raise funds to cater the expenses incurred on launching the main ICO. These expenses include promo ads, recruitment and meet-up costs.
Downsides Of Investing In Pre-ICOs
However, there is one unpleasant side-effect of ICO presales. Early investors or adopters tend to dump tokens as soon as they become tradeable. They often sell the tokens at ICO price when in fact they got the tokens for less than the price of the main offering. They make substantial profits whiles the value of the project token takes a downward hit.
ICOs – Regulations and Legal Considerations
ICOs may fall outside existing regulations, depending on the nature of the project. Or be banned altogether in some jurisdictions, such as China and South Korea. ICOs have been prone to scams and securities law violations. Fewer than half of all ICOs survive four months after the offering, while almost half of ICOs sold in 2017 failed by February 2018. Despite their record of failure and the falling prices of cryptocurrencies, a record $7 billion was raised via ICO from January-June 2018. In January 2018, Facebook banned advertisements for ICOs as well as for cryptocurrencies and binary options. By April 2018, ICO advertising has been banned not only by Facebook, but by Twitter, Google, and MailChimp.
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