Spotlight on Initial Coin Offerings

Published in

Capital Markets 2030

7 min readSep 29, 2022

Initial coin offerings (ICOs) are becoming a popular option for businesses and people to consider when looking to generate funds or take advantage of investment opportunities. The marketplaces for these digital assets are less regulated than traditional capital markets, so even if they may offer a novel and effective way to conduct financial transactions, they also increase the danger of fraud and manipulation.

What is an Initial Coin Offering?

Initial coin offerings, sometimes known as “ICOs,” were formerly a common way to raise money for early-stage cryptocurrency businesses. When conducting an initial coin offering (ICO), a blockchain-based firm creates a specific number of its own native digital token and sells them to early investors.

ICOs, a form of digital crowdfunding, give entrepreneurs the ability to not only raise money without giving up stock but also to build a community of users who are financially motivated to see the project through so their presale tokens appreciate in value.

While ICOs can provide entrepreneurs with a simple funding mechanism and a cutting-edge way to raise capital, buyers can also profit from both access to the service that the token grants and a rise in the token’s price if the platform is successful. Once the tokens are listed, they can be sold on exchange to realize these gains. Alternatively, investors can increase their bet on the project by buying extra tokens when they go on sale.

The primary benefit of ICOs is the elimination of middlemen from the capital-raising process and the establishment of direct relationships between the company and investors. Additionally, both parties interests are congruent.

ICO Structure

An ICO’s token price and the quantity of tokens sold may both be fixed or flexible. Examples of how this can function are as follows:

Fixed number of tokens and a fixed price: Both of these are predetermined by the corporation, for example, by offering a million tokens at a price of $1 each.

Fixed number of tokens and a variable price: The quantity of money received by the company determines the price of a predetermined number of tokens that are sold. A greater token price stems from more investment. Each token would cost $2 if the sale of one million tokens raised $2 million.

Variable number of tokens and a fixed price: The business fixes the price but does not place a cap on the quantity of tokens it will sell. An illustration would be if a business sold tokens for $0.50 each until the ICO ended.

How does an ICO Work?

A sophisticated procedure that involves a thorough understanding of technology, finance, and the law is an initial coin offering. The primary concept behind ICOs is to use the decentralized nature of blockchain technology to raise cash in ways that align the interests of multiple stakeholders. Following is a list of the steps in an ICO:

Identification of Investment Targets: Every ICO begins with the company stating its desire to raise money. The business chooses the recipients of its fundraising effort and develops the pertinent information about the business or project for possible investors.
Creation of Tokens: The production of tokens is the next phase of the initial coin offering. The tokens are essentially digital representations of assets or services on the blockchain. The tokens can be traded and are fungible. Since the tokens are merely alterations of current cryptocurrencies, they shouldn’t be confused with cryptocurrencies. The tokens often do not offer an equity stake in a corporation, unlike stocks. Instead, the majority of the tokens provide their owners an ownership in a good or service that the business has developed.
These blockchain platforms are used to create the tokens. Because a corporation does not have to write the code from start as is necessary to create new coin, the process of creating tokens is rather straightforward. Instead, the production of the tokens is possible with only small code alterations on existing blockchain platforms that power existing cryptocurrencies like Ethereum.
Promotion Campaign: A corporation typically launches a marketing campaign concurrently to entice potential investors. To reach the broadest investor base, it should be noted that the campaigns are frequently run online. The advertising of ICOs is now prohibited on several sizable online platforms, including Facebook and Google.
Initial Offering: The tokens are made available to investors after they have been created. There may be numerous rounds to the offering. The company can then utilize the funds raised from the ICO to provide a new good or service, and investors can either anticipate using their token purchases to gain access to these goods and services now, or they can wait for the value of their tokens to increase.

Pros and Cons of Initial Coin Offerings

Some of the advantages of ICOs are as follows:

If you are able to identify which cryptocurrency is a suitable investment, they have a great potential for profit. Prices are frequently lower because you’re buying early, and other ICOs give tokens at a discount.
Everyone has access to ICOs. There are no restrictions on who can invest, in contrast to other IPOs.
It’s a quick and effective way for startups to raise capital.

The disadvantages of ICOs are as follows:

Due to the cyclical nature of cryptocurrency projects, there is a large chance that the token will depreciate or fail outright.
The absence of regulations leads to an increase in fraud and subpar projects. Finding a good startup among the impending ICOs can feel like looking for a needle in a haystack.
To invest in ICOs, you typically need to have some knowledge of crypto wallets. It’s sometimes simpler for beginners to stick to publicly traded cryptocurrencies or cryptocurrency stocks.

Source: Coindesk ICO Tracker indicating the vast amount of ICOs released during the recent years

ICOs vs IPOs

Initial public offers (IPOs), a fresh stock offering by a private firm, and ICOs are frequently contrasted. Companies can raise money through both ICOs and IPOs.

The main distinction between ICOs and IPOs is that the latter include the sale of securities and are governed by considerably stricter laws. A firm must submit a registration statement to the national registration body (SEBI in India, SEC in the US, etc.) and obtain clearance in order to launch an IPO. Financial information and relevant risk factors should be included in the prospectus that is part of the registration statement.

A cryptocurrency is sold during an ICO; a security is not. As a result, it lacks the formal requirements that apply to IPOs. However, if a business attempted to circumvent regulations by holding an ICO for something that meets the definition of a security, it risked legal repercussions.

Although there are risks associated with both ICOs and IPOs, the regulation of IPOs makes them safer. The top IPO stocks are a worthwhile alternative if you’re feeling overwhelmed by all the ICOs available.

An ownership share in the cryptocurrency project or business is not guaranteed by an ICO. Participants in ICOs wager that a now worthless currency will eventually appreciate in value over their initial investment.

How are ICOs regulated?

The initial coin offering is a brand-new development in both technology and finance. Recent capital-raising procedures have been significantly impacted by the introduction of ICOs. However, the arrival of the new fundraising model in finance caught regulatory agencies everywhere off guard.

Different nations take different approaches to the regulation of initial coin offerings. For instance, ICOs are not permitted by the governments of China and South Korea. Along with the United States and Canada, numerous European nations are developing special legislation to control the operation of ICOs.

In addition, ICO regulations have already been established in a number of nations, including Australia, New Zealand, Hong Kong, and the United Arab Emirates (UAE).

Risks & Considerations

Every token offered through an ICO is regarded as a high-risk investment. Investors are unprotected if an ICO fails or turns out to be fraudulent, the market is currently poorly regulated, and there are many fraudulent initial coin offerings. According to 2018 research written for Bloomberg, at the time, it was estimated that roughly 80% of ICOs were fraudulent transactions.

For anyone looking to participate in an ICO, it’s important to include the following in your due diligence process:

Examine the project team to discover if they have a track record of building profitable enterprises. Team members should ideally include links to their social media profiles so that others can reach them.
Read the project’s white paper and roadmap to understand the expected functionality of the desired product or service, including the timing of the introduction of specific features.
Confirm whether any computer code has undergone a third-party audit. This will be a reliable sign that a project takes security seriously.
Check the website for mistakes; these are typically the first indications that it was created fast and carelessly and may indicate that it is a fraud.

To sum it all

It’s simple to think that we are in the midst of a bubble given the market’s explosive growth in token sales. Whether token sales survive in the long run will depend on regulatory adjustments. However, a closer examination reveals that token sales offer a practical method for businesses to create productive and long-lasting product ecosystems. A corporation has secured a network of suppliers and customers by developing a token with built-in product utility, which is difficult to do so quickly by any other method. This special capacity offers businesses an exciting new possibility and a value proposition that is unmatched by any current technology.