ICOs, or initial coin offerings, are under a significant amount of scrutiny around the world at the moment. Financial regulatory bodies in particular are currently deciding on how to regulate what is the financial equivalent of a wild west scenario, with governmental sectors scrambling to keep up with the runaway blockchain technology train.
ICOs are a powerful way for new and disruptive platforms to gather capital, but have generated a significant amount of controversy due to their unregulated natural. One of the best ways to illustrate the issues with ICOs is to compare them to their contemporary equivalent, IPOs.
Take a look into these new financing strategies that startups around the world are adapting to finance related blockchain projects.
An ICO (Initial Coin Offering) is distinctive from an IPO (Initial Public Offering), far from Wall Street, ICO’s tokens are now what stocks are for the exchange market.
What is behind an ICO ?
ICO are related to the blockchain technology, it’s a new way for companies to raise capital and develop projects around decentralized applications. Early investors are thanks with bounty programs, free tokens with referral programs and gifts for every inscriptions.
This makes ICOs viral, shareable and funded. Behind money that is put into every new project, ICO’s makers release a share of their total supply in order to reward contributors for helping them getting funded.
Usually contributions can be done with Bitcoin (BTC), Ethereum (ETH) or fiat money and there are minimums in order to maintain a substantial amount of participants for the soft cap and hard cap that are freely set by the companies.
Since Ethereum is rising to the moon, the ecosystem of blockchain technology is gravitating around new payment methods and so many people are now considering ETH before Bitcoin and other coins.
What major differences between ICO and IPO ?
As we underlined it before, ICO is the creation of digital tokens on a blockchain that is distributed through public ledger. An IPO, is the distribution of shareholdings to the public through investment banks that are known as underwriters.
Making an IPO isn’t given to every businesses, only established private companies that I’ve been operating for a while are allowed to carry out IPOs. Therefore, even projects with great ambitions can’t access to IPOs, it’s a path that need years of activity, resources and well-established entities.
Most of the companies that are doing ICOs don’t even have a product to present to the public, some of them have proof of concept, others have proof-of-stake. Minimum Viable Product (MVP) is reduced to documents like whitepapers — goldpapers and blackpapers — , partnerships and media relations.
In terms of returns, IPOs offer dividends from company profit. ICOs offer tokens at a price that will rise thanks to the trust put into the project by the public. It’s a promise that is done by the team, it’s difficult to secure and predict the future.
The regulatory environment is definitely different. Indeed, before a private company runs an IPO, it’s an obligation to make applications to relevant authorities and get authorization. On the other hand, ICOs are out of the line, decentralized platforms are above international borders, this makes it harder to create a clear regulatory system.
The true difference between IPO and ICO is that, IPOs work well when it’s centralized and fully control by a corporation. ICOs work well when it’s open-source and there is no central authority.