What are Initial Coin Offerings (ICO)?

An Initial Coin Offering (ICO) is a fundraising method commonly used in the cryptocurrency and blockchain industries. It is similar to an Initial Public Offering (IPO) in the stock market, but instead of offering shares of a company, an ICO offers digital tokens or coins.

Through ICO trading platforms, investors receive unique cryptocurrency “tokens” in exchange for their monetary investment in the business. It is a means of crowdfunding through the creation and sale of a digital token to fund project development.

This unique token functions like a unit of currency that gives investors access to certain features of a project by the issuing company. These tokens are unique because they help fund open-source software projects that would otherwise be tough to finance with traditional structures.

With a total market capitalization of over $100 billion, the cryptocurrency market has attracted the attention of many, including traders looking for quick cash with few regulations.

In the current crypto market, there are two types of ICOs:

Public ICO — Open to the public and available to any investor who is interested.

Private ICO — Open only to a select group of investors who generally have larger amounts of capital.

Traders interested in a public ICO can register via the project’s website or a trading platform, where they can either use or trade their tokens once they have acquired them. Additionally, some projects also reward investors with airdrops or non-fungible tokens (NFTs) as a gesture of appreciation.

How ICOs Work

Creation of a New Cryptocurrency or Token:

A company or organization develops a new cryptocurrency or token, which is typically built on an existing blockchain platform like Ethereum.

The tokens might have specific use cases within a project or be a form of equity in a decentralized application (dApp).

Whitepaper Release:

When a cryptocurrency startup firm wants to raise money through an ICO, it usually puts its plans on a “white paper” to provide investors with important information.

This information will include, but is not limited to: what the project is about; what objectives the project will aim to fulfill upon completion; how much money is necessary to undertake the venture; how many virtual tokens the issuers will keep for themselves; what type of currency is accepted; how long the ICO campaign will run for; and who the team is behind the white paper.

The company issuing the ICO prepares the white paper prior to launching the currency. It is a pivotal component of ICOs, as many investors ask for a whitepaper draft before deciding whether to invest.

Token Sale:

Investors can participate by purchasing the new tokens using other cryptocurrencies like Bitcoin or Ether, or sometimes fiat currencies.

The ICO typically runs for a specific period, after which the tokens may be listed on exchanges where they can be traded.

Use of Funds:

The funds raised through the ICO are used to develop the project. If the project succeeds, the value of the tokens may increase, providing returns to the initial investors.

Cryptocurrency ICO vs. Stock IPO

The biggest difference between a cryptocurrency ICO and a stock initial public offering (“IPO”) is the regulatory oversight. First, as part of the mandatory requirement to register with the regulatory authority, any company looking to issue an IPO must create a legal document called a “prospectus.” The prospectus represents a legal declaration of its intention to issue its shares to the public, and it must meet certain standards of transparency. Among other things, it must include key information about the company and its upcoming IPO to assist potential investors in making an informed decision.

On the contrary, as stated in recent US regulatory action, ICOs only have regulation requirements if they are issued as security tokens rather than utility tokens, which are described in more detail below. However, because such regulatory activity has only recently been developed, investor assessments and due diligence are more difficult to accomplish, especially in comparison to evaluating stock IPOs, which are regulated through strict processes and overseen by accounting firms and investment banks, thereby providing investors with more information and security.

Characteristics of ICOs

High Risk, High Reward: ICOs can offer substantial returns but are also highly speculative and risky. Many projects fail, and there is a risk of scams.

Regulatory Landscape: ICOs have faced increased scrutiny from regulators around the world due to concerns about fraud and investor protection.

Utility vs. Security Tokens: Tokens sold in ICOs can be either utility tokens (used to access a service or product) or security tokens (representing ownership or debt). The classification can have significant legal implications.

Benefits:

Access to Capital: ICOs allow projects to raise funds quickly from a global pool of investors without needing traditional financial intermediaries.

Decentralization: Investors have the opportunity to support decentralized projects and potentially benefit from their success.

Risks:

Lack of Regulation: Many ICOs operate in a regulatory gray area, which can lead to potential legal issues or scams.

Market Volatility: The value of ICO tokens can be highly volatile, leading to potential losses.

Examples of an initial coin offering (ICO)

ICOs are an extremely popular way to raise money in the crypto space. Most fail, but there's also the occasional diamond in the rough. Here are some examples of major ICOs over the years:

Ethereum: Lots of crypto enthusiasts were excited about Ethereum and its programmable blockchain when its July 2014 ICO took place. It ended up raising $18.4 million and then became the second-largest cryptocurrency.

Cardano (ADA -2.0%): Cardano improved on aspects of Ethereum and had an even more successful ICO. In January 2017, it raised $62.2 million. It would eventually break into the top five cryptocurrencies by market capitalization.

Tezos (XTZ -4.22%): Tezos raised $232 million through its ICO in July 2017, but it wasn't a complete success. There were numerous delays in distributing the tokens sold through the ICO, leading to a class action lawsuit. Tezos reached a $25 million settlement with all parties in 2020.

Dragon Coins (CRYPTO:DRG): There have been many failed ICOs, and Dragon Coins is one of the most high-profile examples. In March 2018, it raised $320 million. A series of controversies caused a near-immediate price drop when it was available for public trading. In 2021, its market capitalization fell below $1 million.

Conclusion

In summary, an ICO is a way for new cryptocurrency projects to raise funds by selling digital tokens to investors. While it offers opportunities for high returns, it also comes with significant risks.