With over a market capitalization of over $100 Billion, ICOs have helped over 3000 companies and block-chain related projects to raise capital. It has enabled investors and even supporters to fundraise for the companies they are interested in. This article explains what ICOs are; types, benefits, disadvantages and how to identify scam ICOs.
What are ICOs?
Initial coin offering (ICO) is simply a type of fundraising similar to Initial Public Offering (IPO) that uses cryptocurrencies to raise capital for companies or projects. It is mostly adopted by crypto or blockchain related project or companies.
The interested investors or supporters of the project invest using either fiat currency or cryptocurrencies like Bitcoin and Ethereum and then receive a cyptocurrency token by the company they are investing in. The token given can either be a stake in the company or a utility that can likely increase in value in the future.
Types of ICOs
· Private ICOs: This is a type of ICO that controls the number of people that are allowed to invest in the company. Only accredited investors are allowed to invest.
· Public ICOs: In Public Initial coin offerings, both investors and supporters are allowed to join in the investment process. The process is not regulated as the public has direct access to the investment.
How ICOs work?
Companies that want to raise capital for their blockchain projects undertake ICOs. Entrepreneurs who have ideas on project that they would love to launch too can undertake an ICO. All they have to do is to create a whitepaper which outlines what the project is about, the importance of the project, how much they want to raise, the business plan, and how many tokens would be given out and the amount of time they want to use to raise the money.
The project owners or the companies then create tokens. The tokens would be given to the investors to represent their investments. They engage in ICO Campaigns so as to attract investors.
Investors who are interested in the project then invest their money to the project and then get tokens in return. The token might either represent a stake in the company or be a utility that can possibly increase in value.
An example of this is the Initial Coin offering of Ethereum. Ethereum founder, Vitalik Buterin undertook an ICO for his idea. He later raised around $18 Million dollars and gave the investors ethers as tokens. Since then a large number of companies have been using ICOs as a method of fundraising.
Which is better? IPOs or ICOs
Traditional companies undertake an IPO to offer the shares of capital stock to investors. But before they do that, they must be registered with the SEC for regulation. ICOs on the other hand offer ‘tokens’ similar to shares. If the project grows big, the investors can make lots of money on their investments based on the number of tokens they are given.
But a major problem in ICOs is that unlike IPOs, they are not regulated. This has led to a major number of scams deceiving investors and stealing their funds. Anyone can create a whitepaper and lead investors to invest in the fake project and run away with the investments.
Due to these reasons, some countries have banned ICOs while some has tried regulating it although it still remains unregulated in a large number of countries.
ICOs have been banned in countries like China, South Korea, Bolivia, Nepal, Bangladesh, and Macedonia. Violators are prone to customary fines and even imprisonment! Countries like the USA, New Zealand, UAE and Canada have put regulations on ICOs.
Although ICOs can be used for frauds, the positive impacts cannot be overlooked. It gives companies or entrepreneurs opportunities an alternative to raise money for their projects other than IPOs. The process is faster and easier.
It is expected that as an investor, you reach out to a financial advisor so as to understand the investment before you make it. If possible make sure you know the team working on the project. Also always remember, ‘if it sounds too good to be true, it probably isn’t correct’.
