ICOs: Redefining the way companies raise capital in public offerings

As an investor in the stock market, you must be familiar with Initial Public Offerings also known as IPOs. It is the first sale of stocks by a company to the public. The company can raise money by issuing either debt or equity.

In case, it chooses the equity route, the first such offering of equity shares to the public via their listing in a stock market exchange is called an IPO. IPOs are often issued by relatively smaller, and younger companies seeking capital investment in order to expand. But they can also be conducted by large, and privately owned companies looking to become public.

Taking this understanding of IPOs in consideration, let’s talk about something similar. Something which doesn’t involve hefty paperwork and convoluted regulations. Something called an ICO. Congruent to the IPO mechanism, contrary to the sale of equity stocks, ICOs consist of digital “token” distribution in a crowd sale.

These crowd sales act as platforms for upcoming firms to raise funds and give potential investors a chance to avail a stake in the product/service offered by the company. Investors buy tokens, units of digital currency which are typically meant to be an integral part of the application that the startup wants to build.

The bet is that the application will be popular and thereby generate demand for the tokens, increasing their value. Dozens of ICOs have already been launched, raising more than $230 million last year, followed by more than $450 million just in the first half of 2017.

If you are aware about the recent and latest developments in the world of finance and technology, you would have come across a term called “blockchain”. A blockchain unlike banks and other centralised bodies is a decentralised ledger technology which powers digital currencies or cryptocoins like Bitcoin, Ethereum, Ripple, etc.

Many of the hottest blockchain assets today are not digital currencies like Bitcoin or Ethereum, but digital tokens as talked about earlier. They are distinguished from their cryptocurrency counterparts by their lack of a unique blockchain.

They instead run on existing blockchains, primarily Ethereum’s, and are built as per ERC20 norms for specific applications, such as a peer-to-peer marketplace for computation (Golem), a crowdsourced prediction market (Augur), or a blockchain-based advertising platform (Brave).

ICOs take place in pre-sale and post-sale settings. In a pre-sale ICO, investors get to buy tokens at discounted rates than the actual ICO token sale. For example, Imagine Facebook issuing a token to its users, with its value getting derived from the content and connections generated on the social network. Early users would scoop up large quantities of the token at rock-bottom prices. While those who dropped late to the party, would find themselves able to afford only a few. But all of them, by holding this digital asset, would be able to participate in Facebook’s growing success.

This, of course, is not the case. The $435 billion value of Facebook is shared only among Mark Zuckerberg and other stockholders. Most other internet platforms operate on the same principle. Their owners extract massive value from interactions between users.

With blockchain-based systems, by contrast, “there’s no longer a division between users and owners,” says Carlson-Wee. The tokens are a wealth-sharing mechanism, a way that everyone from hedge funders to consumers can take positions in, and place bets on the future of internet.

ICOs are the next big chapter, after crowdfunding, in the democratization and decentralization of finance, says Brock Pierce, a co-founder of a San Francisco venture capital firm, Blockchain Capital, that invests in cryptocurrency startups. His firm recently raised $10 million by issuing its own blockchain token, becoming the first venture capital firm in the world to do so. (The token sold out in six hours.)

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