Understanding Initial Coin Offerings
Defining ICOs
An Initial Coin Offering (ICO) is a fundraising tool which makes it possible for predominantly blockchain startups to offer cryptocurrency tokens to the public or investor communities in exchange for financial contributions typically accepted in the form of Bitcoin, Ethereum or other cryptocoins. The most common reason given for early stage companies utilising this capital raising mechanism is that it is a quick and convenient way to raise the necessary funds required to develop their ideas and bring products and services to market on the blockchain. ICOs can also be leveraged by traditional businesses as way to finance or spin-off strategically irrelevant business ideas from incubator or accelerator programs.
ICO tokens are in essence digital coupons, utility or software access tokens issued on a distributed ledger, or blockchain. The coins offered through ICOs are supposed to be representative of ‘capital or shares’ in the blockchain startups and projects responsible for issuing the relevant tokens. ICOs tend to be executed at the early stage of startup companies as a means of financing the setting up and running costs of the project until it is live. However, some blockchain companies have used initial coin offerings at advanced to late stages of their project lifecycle as an alternative to seeking traditional venture capital funds.
A Brief Background to ICOs
Initial coin offerings are a relatively new phenomenon and it is important to note that the market is still significantly smaller than the traditional venture capital market globally. Also commonly referred to as token sales or crowd sales, initial coin offerings, have been both popular and controversial, which has caught the interest of many regulators across the world, most of which can barely understand the underlying blockchain technology. Currently, there have been many countries which have made some efforts to regulate the trade of cryptocurrencies and bring some clarity on the issue of taxation around these cryptographic trades but in most places around the world, there are still no binding rules in existence.
Many ICOs already exclude investors from certain nations to avoid future problems and jurisdictions such as Switzerland, Hong Kong, Singapore, Mauritius, South Korea, India, Puerto Rico, Cayman Islands, USA, Russia and China to name a few, have publicly given their views about the cryptocurrency and ICO market. The government of the British overseas territory of Gibraltar, together with their Financial Services Commission announced in February that they will be developing a draft law to regulate ICOs. The draft law, which is aimed at regulating the promotion, sale and distribution of digital tokens within the territory, is set to be the first ever set of regulations to be developed specifically for ICOs.
Differences between ICOs and IPOs
An ICO essentially involves a company selling cryptocurrency tokens to the general public. In return for their investment, participants in a particular ICO typically receive a set number of digital currency tokens to be used as utility tokens or currencies on the respective platforms.
Initial coin offerings offer tokens while initial public offerings offer securities but that is just one distinction. ICOs are currently under an enormous amount of scrutiny globally. Financial regulation authorities in particular are currently deciding on how to regulate and keep up with the fast-pace developments in blockchain technology.
The process of launching an ICO involves such activities as:
● releasing a white paper with comprehensive project details;
● getting crowdsale participants acquainted with key management to establish legitimacy and provide data to help verify team credentials;
● breaking down the tokenomics;
● establishing the total token cap;
● outlining the budget and distribution of token funds;
● providing a chronological roadmap to be followed by the company on their quest; and
● milestones in the development process of their blockchain technology.
To the contrary, IPOs are almost considered financial market legacy processes which enable companies to market and sell securities to the public. Companies tend to launch IPOs but also sell a range of other securities, including warrants, bonds, and capital notes. In both instances however, the idea is to conduct a sort of crowdfunding capital raise where funds will be used to develop the idea in hopes that the capital asset held by investors will appreciate in value if the business is successful, which will potentially reap rewards for the early adopters. The common denominator between IPO and ICO investors is generally the motivation by potential future success of a start-up and the increase in value of issued tokens.
In order to launch an IPO however, a company will typically:
● hire underwriters to work in tandem with the company and develop a clear analysis of how much the IPO will raise;
● determine the types of securities that they will offer;
● create a preliminary prospectus providing a breakdown of information about the business and strategic plans, management structure, ownership structure, and financial data; and
● develop, refine, and revise the prospectus so that a final version is then submitted to a regulatory body in order to approve the IPO.
Ultimately, ICO campaigns are conducted online and via social media channels. The coins or tokens created are issued using distributed ledger technology which means that essentially anyone who has access to the internet can participate in an initial coin offering. This open access to the crypto market has led to a flood of millennial and non-traditional investors who are typically excluded from traditional market participation since it is generally reserved for hedge funds and institutional investors with limited access given to individual investors. These factors have contributed a great deal to the popularity of ICOs among blockchain businesses and the general public.
How CryptoProfile can help ICO achieve maximum impact
We invest considerable time and resources because our dedication to ensuring that we fully understand the fast-evolving crowdsale opportunities available to your project. We do in-depth research and monitor developments happening within the crypto space including regulatory compliance. Some of the areas we focus on when working on an ICO project include ICO investor relations, influencer marketing, media and PR, end-to-end advisory, and community building.
