The abbreviation ICO stands for Initial Coin Offering. During the ICO, the project team sells digital tokens for cryptocurrencies or fiat money among investors. Later, these coins can be used on the project platform as an internal currency or traded on exchanges. Also, the term “Crowdsale” is often used instead of ICO.
What is the purpose of ICO?
By issuing its own tokens and exchanging them for popular cryptocurrencies (Bitcoin or Ethereum) or fiat currencies (dollars or euros), the project attracts the funds needed to launch or develop. As a rule, ICO is held at the early stages of the existence of projects, before creating their full infrastructure. The raised funds are used to finance the final stage of development, marketing or are sent to special development funds to support projects in the long term.
What is the legal status of ICO?
Currently, ICO cannot be called both legal and illegal ways to attract investment. Its legal status, procedure, and requirements for companies that are going to raise funds in this way are not currently defined in any country of the world. In addition, it is difficult to determine the legal nature of the relations arising during the ICO. Since financial relations in their classical sense, such relations are difficult to call. At the same time, it is safe to say that the basis of this process is the reputation of the people behind the cryptocurrency startup, and the trust of users (potential investors).
Comparing the ICO with the IPO
When a company wants to offer its shares to the General public, it conducts an IPO (Initial Public Offering). ICO can work on a similar principle: investors, investing funds, receive a “share” in the company in the form of tokens. At the same time, ICO has common features with crowdfunding: funds are usually collected for the implementation of a certain idea, that is, at the stage when the project doesn’t have a finished product.
Also, the IPO is regulated by national legislation. For example, in the United States, a company must be incorporated as a joint-stock company and registered with the SEC (Securities and Exchange Commission) for public offering. All this makes the process of attracting investment in the project at an early stage of its development more difficult but provides certain guarantees to investors.
In the case of ICO, the process of attracting investments is much easier, but users are not insured.
What attracts investors to ICO?
Buying offered on ICO tokens, investors first and foremost expect:
- To benefit from their sale at a higher price in the future (a classic example is Ethereum, whose tokens during the ICO in the summer of 2014 cost less than one cent, and today their price has risen to almost $400)
- Use tokens for their intended purpose, receiving the claimed services at a lower price
Risks of participating in the ICO
Perhaps the biggest risk can be called the usual fraud when the creators of the project have only one goal: to raise money users. In addition, since there are no laws that would regulate the conduct of cryptocurrency crowdsales at the moment, from the investor’s perspective, these investments are always based on trust. It cannot be ruled out that the project may not live up to the stage of the appearance of the product or disappoint the investor with its implementation.
In addition, in its current form, ICO is usually held in one round, and the chances of getting additional funding from them are small. This can also be seen as a potential risk in terms of the long-term existence of the project.
What should you pay attention to before participating in the ICO?
The abundance of different ICOs can confuse many inexperienced investors. Therefore, first of all it is necessary to carefully investigate the sales agreement (Token Sale Agreement). When reading this document, curious details may surface, which the organizers of the ICO may not have publicly stated. In addition, there are unspoken indicators of good intentions of the project:
- Availability of all necessary agreements and rules published on the website as a public offer.
- Ready working prototype.
- Properly drafted the whitepaper and the remaining documentation.
- Availability of escrow (special conditional account, which takes into account the property, documents or funds until certain circumstances or the fulfillment of certain obligations).
- Incorporation (registration) of the company.
- The unsullied reputation of the people behind the project.
Examples of the most successful ICO
The success of the ICO is a rather conditional thing. However, the generally accepted indicator is the amount of funds raised. In this regard, the leadership at the moment (we are talking about dry statistics, discarding other possibly controversial aspects of the campaigns) belongs to the Bancor project, which in June 2017 collected 396 720 ETH in less than three hours. An example of another rapid crowdsale was the campaign of the innovative browser Brave: in about 30 seconds, the project managed to achieve its financial goal and raise $35 million.
In May 2017, the list of successful cryptocurrency crowdsales was replenished by Storj ($30 million in less than a week) and Aragon projects — in just 15 minutes from the start of the ICO, the project collected the planned 275,000 ETH (about $25 million).
You can also recall the projects MobileGo ($53 million), Gnosis ($12.5 million in 10 minutes), Blockchain Capital ($10 million in two hours), Aeternity (23.4 CHF) and finally led to a failure in the Ethereum network project Status (about $100 million).
Also, do not forget about the project The DAO, which has already become part of the history of the cryptocurrency world, as a result of the collapse of which Ethereum Classic appeared in the summer of 2016.
ICOs have been an extremely hot topic for a couple of years now and we hope that we were able to throw some light on the subject for you. It will be interesting to see how future ICOs pan out and the regulations become more and more strict. Let’s hope that the increased regulations are going to have a positive effect by flushing out scammy ICOs.