Investing with IPO or ICO, which one is for you?

Introduction

1. What is an IPO?

2. What is an ICO?

3. IPO and ICO differences

a) Project requirements

b) Investor Requirements

c) Utility (investor profit)

Conclusion

Introduction

Investment is a serious activity, especially into early stage ventures that often desires a high tolerance of risks and shrewd judgment over projects in lack of public information. Both IPOs and ICOs are such investments, and are primarily suitable for astute, aggressive venturers. ICO, a democratic analogue of IPO in the cryptocurrency market, is getting attentions from more and more tech startups who prefer to raise funds via blockchain vehicles. Recently, a wave of ICOs have swept the world — many startups elected to tokenize their businesses, attracting tens of millions of dollars. People buy tokens in the hope of making a profit in the future, thereby providing the companies with seed capital for development. However, no one is immune from the risks that any startups may close, and their tokens may lose value.

At the moment, the biggest difference between the two is that the bar to enter an IPO is much higher than an ICO — it is harder to participate in an IPO with all legal requirements resolved. In the meantime, ICO has its own nuances that many are not aware of. Among the “growth problems” of new technologies are potential fraud and dishonesty. The field remains highly unregulated, and one should suit up with a good toolkit before diving into the open sea.

1. What is an IPO?

IPO is short for Initial Public Offering, simply put, the sale of securities of a company to the public.

An IPO is carried out by established private companies to attract more investors to a specific project. For such companies, IPO is a way for them to become open-ended and publicly owned. They are required to provide detailed financial information to the public along the process.

Investing in IPOs in the U.S. are tightly regulated by the U.S. Securities and Exchange Commission (SEC), which requires that an investor has certain financial capabilities and does not use IPOs for money laundering. In particular, SEC enforces AML (anti-money laundering) and KYC (know your customer) measures, aiming at full identification of any individual before large financial transactions).

Quarterly IPO activity in the US market

What founders have to keep in mind is that an IPO is not the end but actually the beginning.” — Nithin Kamath, Zerodha

Size of IPOs by year in the US market

2. What is an ICO?

ICO stands for Initial Coin Offering. In other words, this is a peculiar, new form of initial investment on new projects that emerged due to the growing popularity of cryptocurrencies. As a matter of fact, an ICO is nothing more than a fundraiser for a project, and a new type of crowdfunding.

The first ICO was carried out in 2013. In recent years, ICO is gaining popularity not only due to the rising awareness of cryptocurrencies, but also the fact that it is easier to take part in, either you are a creator of a project or an investor.

“ICO’s are also democratizing early-stage investing, allowing a wider pool of investors to participate. Token offerings shift power and control to the blockchain rather than one or two influential investors.” — Jeff Tennery, CEO and co-founder of Moonlighting.

Though not always easier, an ICO process is usually much faster than that of an IPO. In a relatively short period of time, it is possible to resolve all legal requirements (for example, register a company in a particular jurisdiction — Switzerland and Singapore are currently considered the most attractive countries, and obtain all legal documents), hold negotiations with private investors, go through road shows, and most importantly, prove and present that the project itself is worth all these efforts.

Total ICO Funds Raised by End Month (USD, bln)

Useful Services:

ICOBENCH — an ICO rating platform and a blockchain community supported by a wide range of experts that provides analytical, legal, and technical insights to the investors.

ICOSTATS — displays the dynamics of token prices after the ICO.

ICO Rating — a kind of ICO catalog that displays many parameters of upcoming and current ICOs.

ICO calendar — ICO calendar with the ability to include reminders about the beginning of fundraising.

3. Comparing IPO and ICO

The first and formost difference: IPOs are usually held by experienced companies, while ICOs are young and risky. To illustrate with a metaphor, the IPO is like an experienced senior owner of a gardening equipment manufacturer, and the ICO is a young computer geek assembling a PC in dad’s garage. The former has a profitable business, a big bank account and a good business reputation. The latter has none of the above. But the young talent has the potential of becoming the new Steve Jobs. Would you prefer to invest in a young and unknown computer genius or in a reputed businessman? The intention is the same: hoping that the business would grow and your profit would multiply. Yet greater returns always accompany higher risks.

a) Project requirements

> IPO

Before placing its shares for sale through an IPO, a company must meet a number of requirements, including a minimum income threshold and good performance. Conventional issuance during an IPO can be a lengthy process due to internal legal burden and regulatory compliance. Potential investors need to make an informed decision. Therefore, one of the requirements is a prospectus — a legal statement of intent to issue shares to the public. It should include key information about the upcoming IPO.

> ICO

Since ICOs do not have to adhere to most regulatory framework or legal protocol yet, most of the projects have no track record and are backed up mostly by their white papers.

The duration of an ICO process is much shorter. Typically, an ICO project publishes a white paper, but here, unlike an IPO, there are no formatting standards. Also keep in mind that in some countries such a document does not have legal force at all. Programmers and the Internet are usually more essential ingredients for an ICO.

There needs to be some standards around launching an ICO and investing in ICOs in the space, and I caution all to tread carefully until those standards emerge.” — Nick Tomaino, Founder of 1confirmation.

b) Investor Requirements

> IPO

If you invest in a company from your country, everything is quite simple. If you invest in a foreign company, usually there is an additional legal procedure, most likely you need a broker’s assistance.

> ICO

This is the best part. The only thing you need for investing in an ICO is access to the Internet. You can usually buy any tokens of any project from any country. The exception is some U.S. projects are ruled as securities upon ICO or elect to stay compliant to security laws, and hence are not available to US citizens. Otherwise they would have to go through the labor of IPO reporting, which goes against the very essence of the ICO.

c) Utility (investor profit)

> IPO

Shares acquired through an IPO represent the rights to a share of the company’s future earnings. Shareholders may receive dividends periodically. Another way to earn profit is to invest at an early stage and sell the shares when their value rises.

> ICO

Coins do not represent ownership of the project. The white paper usually describes the token structure, use cases, the ways to invest and potential future benefits. This can be a market price at which you can buy or sell them, the payment that you receive if the company earns a revenue, the application value as the coin acquires more application scenarios, etc.

ICO and IPO — Pros and Cons

The most profitable IPOs vs the most profitable ICOs of 2019

IPO and ICO feature comparison

Conclusion

Does this mean that an IPO is more profitable than an ICO on an average?

It may seem so at the first glance, but in fact not necessarily. With all the legal documents, regulations and compliance requirements in place, the company can still go bankrupt with all investments burnt. On the other hand, if one chooses a promising, legit ICO project, it may turn out to be a very profitable investment with significantly less bureaucracy. Either way, it is strongly recommended that you carefully study all available resources to make sure that the project is worth your time, attention and capital.

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A Scientific Publisher and Asset Manager on blockchain

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