ICO – Initial Coin Offering

What is an Initial Coin Offering (ICO)?
An Initial Coin Offering (ICO) is the cryptocurrency industry’s equivalent of an Initial Public Offering (IPO). A company looking to raise money to create a new coin, app, or service is launching ICO as a fundraising tool.

Interested investors can take part in the offer and receive a new cryptocurrency token issued by the company. This token may have some utility when using a product or service that the company offers, or it may simply represent a stake in a company or project.

MAIN CONCLUSIONS

• Initial coin offerings (ICOs) are a popular fundraising method used primarily by startups looking to offer products and services typically associated with the cryptocurrency and blockchain space.
• ICOs are similar to promotions, but sometimes they are useful for the software service or product offered.
  Some ICOs have brought huge returns to investors. Many others turned out to be scammers, failed, or performed poorly.
• To take part in an ICO, you usually need to purchase digital currency first and have a basic understanding of how to use cryptocurrency wallets and exchanges.
• ICOs are largely unregulated for the most part, so investors must exercise a high degree of caution and prudence when researching and investing in ICOs.

How an Initial Coin Offering (ICO) works
When a cryptocurrency startup wants to raise money through an ICO, it usually creates a technical document that outlines the essence of the project, the needs that the project will satisfy upon completion, how much money will be required, how many virtual tokens the founders will keep, what money will be accepted and how long the ICO campaign will last …

During the ICO campaign, project enthusiasts and supporters buy some of the project’s tokens for fiat or digital currency. These coins are called token buyers and are similar to the company’s shares sold to investors during an IPO.

If the collected money does not cover the minimum amount of funds required by the firm, the money can be returned to the sponsors; at this stage, the ICO will be considered unsuccessful. If the funding requirements are met within the specified time frame, the money raised is used to achieve the project’s objectives.

Special considerations
Investors wishing to participate in the ICO should first become more familiar with the cryptocurrency space. In the case of most ICOs, investors must buy tokens with pre-existing cryptocurrencies. This means that the ICO investor should already have a cryptocurrency wallet set up for a currency like Bitcoin or Ethereum, as well as a wallet capable of holding any token or currency they want to buy.

How to find an ICO to participate? There is no recipe for keeping up with the latest ICOs. The best thing an interested investor can do is read about new projects on the Internet. ICOs are causing a lot of excitement, and there are many places on the Internet where investors gather to discuss new opportunities. There are special sites where ICOs are collected, which allows investors to discover new ICOs and compare different offers with each other.

Initial Coin Offering (ICO) and Initial Public Offering (IPO)
For traditional companies, there are several ways to raise the funds needed to grow and expand. A company can start small and grow as much as its profits allow, while remaining in debt only to the owners of the company. However, this also means that they may have to wait a long time to accumulate funds. Alternatively, companies can look to outside investors for early support that will provide them with a quick cash flow, but usually compromises in the form of a transfer of part of the ownership interest. Another method is to go public, raising funds from individual investors by selling shares through an IPO.

While IPOs deal exclusively with investors, ICOs can deal with supporters who are eager to invest in a new project, much like a crowdfunding event. But ICOs differ from crowdfunding in that ICO sponsors are motivated by the perceived ROI of their investment, while funds raised in crowdfunding campaigns are mostly donations. For these reasons, ICOs are called “crowdsales”.

ICOs also retain at least two important structural differences from IPOs. Firstly, ICOs are largely unregulated, which means that government agencies like the Securities and Exchange Commission (SEC) do not control them.3 Secondly, due to their decentralization and lack of regulation, ICOs are much freer in terms of structure than an IPO.

ICOs can be structured in different ways. In some cases, the company sets a specific goal or limit for its funding, which means that every token sold in the ICO has a predetermined price and that the total supply of tokens is static. In other cases, there is a static supply of ICO tokens, but a dynamic funding goal – this means that the distribution of tokens among investors will depend on the funds received (i.e., the more total funds received in the ICO, the higher the total token price).

However, others have a dynamic token offering that is determined based on the amount of funding received. In these cases, the token price is static, but there is no limit on the total number of tokens (except for parameters such as the ICO length). These different types of ICOs are shown below.

Advantages and Disadvantages of an Initial Coin Offering (ICO)
In an IPO, the investor receives shares in the company in exchange for its investment. In the case of an ICO, there are no shares as such. Instead, companies that raise funds through ICOs provide a blockchain, the equivalent of a stock – a cryptocurrency token. In most cases, investors pay with popular existing tokens such as Bitcoin or Ethereum and receive a commensurate supply of new tokens in return.

It’s worth noting how easy it is for a company to launch an ICO to create tokens. There are online services that allow you to generate cryptocurrency tokens in a matter of seconds. Investors should keep this in mind when considering the differences between stocks and tokens – the token has no intrinsic value or legal guarantees. ICO managers generate tokens in accordance with the terms of the ICO, receive them, and then distribute according to their plan, transferring them to individual investors.

Early investors in ICO operations are usually motivated to buy tokens in the hope that the plan will be successful once it is launched. If this does happen, the value of the tokens they purchased during the ICO will rise above the price set during the ICO itself, and they will achieve a total profit. This is the main advantage of ICO: the possibility of very high profitability.

ICOs have truly made many investors millionaires. For example, in 2017, there were 435 successful ICOs, each of which raised an average of $ 12.7 million. Thus, the total amount of funds raised for 2017 amounted to $ 5.6 billion, of which the  largest projects attracted 25% of this amount. In addition, the tokens purchased during the ICO returned an average of 12.8 times the initial investment in dollar terms.

As ICOs came to the fore in the cryptocurrency and blockchain industry, they also brought with them challenges, risks, and unforeseen opportunities. Many investors invest in ICOs in the hope of a quick and significant return on their investment. The source of this hope comes from the most successful ICOs of the past few years, as they have indeed brought in huge profits. However, investor enthusiasm can also confuse people.

Since they are largely unregulated, ICOs are rife with scams and scams that seek to prey on overzealous and ill-informed investors. And since they are not regulated by financial authorities such as the SEC, funds lost due to fraud or incompetence may never be returned.

The rapid growth in the number of ICOs in 2017 caused a negative reaction from a number of governmental and non-governmental organizations in early September 2017. The People’s Bank of China officially banned ICOs, calling them counterproductive to economic and financial stability.

The Central Bank of China has banned the use of tokens as currency and banned banks from offering ICO-related services. As a result, Bitcoin and Ethereum prices plummeted, which many saw as a sign of the impending tightening of cryptocurrency regulation. The ban also imposed fines on already completed offers. In early 2018, Facebook, Twitter, and Google all banned ICO ads

There is no guarantee that an investor will not lose out on fraudulent investment in ICOs. To avoid ICO scams, investors should:

1. Make sure the project developers can clearly define their goals. Successful ICOs usually have simple and straightforward technical documents with clear and concise goals.
2. Know the developers. Investors should strive for 100% transparency of the company launching the ICO.
3. Check out the legal terms set for the ICO. Since external regulators do not usually control this space, the investor must ensure that any ICO is legal.
4. Make sure the ICO funds are stored in an escrow wallet. This is a wallet that requires multiple keys to access. This is useful protection against fraud, especially when a neutral third party holds one of the keys.

Securities and Exchange Commission presents HoweyCoin
In 2019, ICO activity began to decline sharply due to the legal gray zone in which they live.

The US Securities and Exchange Commission has unveiled a fake coin called HoweyCoin to demonstrate to small investors the dangers of ICOs. HoweyCoin is named after the Howey Test, which is designed to determine if an investment is a security or not. Howie’s test is designed to determine that a transaction constitutes an investment contract if a person invests their money in a common enterprise and expects to profit solely from the efforts of the founder or a third party.

The US Securities and Exchange Commission used this standard to charge Kik, a messaging service that raised $ 100 million in an unregistered ICO for illegal securities sales. The SEC also took action against Telegram, another messaging app that also ran as part of the ICO.

According to the SEC, an ICO is no different from an IPO if the underlying token brings money for an existing business and does not work independently of that business.

Example of an Initial Coin Offering (ICO)
As the ICO space got bigger and bigger, so did the amounts raised by the largest projects. When evaluating an ICO, you can take into account both the amount of money collected during the ICO and the return on investment.

Sometimes ICOs with great ROI are not the projects that generate the most money, and vice versa. The Ethereum ICO in 2014 was a pioneer, raising $ 18 million in 42 days. Ethereum has proven to be crucial for the ICO space as a whole due to its innovations in decentralized applications (dApps). When it debuted, Ether was priced around $ 0.67, and as of September 24, 2020, it was trading at $ 348.99.

In 2015, a two-stage ICO began for Antshares, which was later renamed NEO. The first stage of the ICO ended in October 2015, and the second lasted until September 2016. During this time, NEO has earned about $ 4.5 million. While not one of the largest ICOs in terms of raised money, it has provided exceptional ROI for many early adopters. The NEO price during the ICO was around $ 0.03, and at its peak it traded at about $ 187.40.

More recently, ICOs have generated significantly larger amounts in terms of the total amount of funds raised. During the month-long ICO ending in March 2018, Dragon Coin managed to raise about $ 320 million. Most recently, the company behind the EOS platform broke the Dragon Coin record, raising a whopping $ 4 billion during its one-year ICO.