ICO vs IPO

ICO vs IPO – which is better for companies and shareholders?

The emergence of ICOs (Initial Coin Offerings) has become a headline these days and is generating tremendous interest. They are considered to be a revolutionary financing method replacing IPOs (Initial Public Offering) using blockchain technology and cryptocurrency. While there is no doubt that ICOs have proven to be a great way to raise capital, can they really replace IPOs? To answer this question, we must analyze all aspects related to these methods of financing.

What are the main differences between ICO and IPO?

ICOs and IPOs are very similar in that both are lucrative funding methods for start-up companies in which the government funds the project in exchange for something. However, one of the most important differences between the two is what the investor receives in exchange for funding. In the case of an IPO, the accredited investor has the right to participate in the capital of the company (the assets of the company minus its liabilities) and the right to vote with respect to the company. While in the ICO, the average investor will require ownership and use of the token issued in the ICO, but will not have any capital or voting rights in the underlying company. These points mentioned are the most important differences between ICO and IPO, but there are 6 more differences. See them below.

Stage 1
An ICO usually happens at a very early stage in a company/project. Often before he has any working products or services and needs working capital to bring their untested concepts/ideas to life. Hence, ICOs are riskier and should require a higher return on investment than IPOs. For comparison, an IPO occurs at a later stage in the company’s development. Often they already have a work product that generates income and requires long-term capital and development rather than working capital.

2. Regulation
Another important difference between ICOs and IPOs is regulation. While ICOs are largely self-regulated through smart contracts on the blockchain, IPOs are strictly regulated by government regulators such as the Securities and Exchange Commission (SEC). Therefore, it is generally safer to invest in an IPO rather than an ICO. However, there have been fraudulent IPOs in the past. The fact that they are regulated does not mean that investors are safe, as an investor you should proceed with caution and due diligence.

3. Listing requirements
An ICO can be launched without a base token available on exchanges. This means that investors can invest in ICOs, receive tokens, and if they are never listed on the exchange, they can never sell their crypto tokens. On the other hand, IPOs must have their shares already listed on the exchange. This guarantees cooperation between them and gives the investor peace of mind.

4. Beneficiaries (intermediaries)
ICOs were able to work much more efficiently than IPOs since they got rid of the need for intermediaries (exchanges, brokerage companies, underwriters, regulators, etc.). Hence, the ICO can be much more profitable, which benefits the investor and the company/project conducting the ICO. In comparison, IPOs must pay up to 4% to brokers and various other commissions and interest to participating intermediaries.

5. Distribution
One area in which many ICOs have failed to improve themselves after the IPO is investment allocation. For example, some ICOs have an unfair distribution of their crypto tokens because the whales buy most of the coins, which then distorts the price and allows the market to be manipulated. IPOs, on the other hand, allocate their shares using a variety of viable methods that are approved by regulators and ensure a fair distribution of shares of assets.

6. Type of investor
Investors involved in an IPO must comply with strict requirements set by regulators and brokers. This includes complying with KYC (Know Your Customer) and AML (Anti-Money Laundering) laws. On the other hand, many ICOs have no requirements and anyone with internet access can participate. However, it looks like the situation is changing in recent ICOs, and the upcoming regulation requires compliance with these requirements.

Internal work of ICO and IPO
Now that we know the main differences between these profitable financing methods, how exactly do they get started and performed? First of all, let’s discuss IPOs as they were the first method of government funding for companies.

Internal work of ICO and IPO
Now that we know the main differences between these profitable financing methods, how exactly do they get started and performed? First of all, let’s discuss IPOs as they were the first method of government funding for companies.

An IPO occurs when a relatively new company has a working product or service but requires additional funding to achieve its long-term goals. The company obtains this financing by selling to investors the shares of the company, which investors must hold for a period of 90 to 180 days after the company goes public. After this period, the investor can sell his shares on the exchange or hold them for a longer-term investment.

As for ICOs, they are carried out at a very early stage in the development of a company/project and start with the goal of generating working capital to bring your idea to life. The new project generates this funding through the sale of its underlying cryptographic token, which is based on an open-source decentralized blockchain. A crypto token sold to investors in an ICO will be exchanged for another cryptocurrency such as Bitcoin or Ether. The investor will then store their ICO crypto-token in a compatible wallet and will need to wait for the ICO to complete or sometime after selling their crypto tokens. The duration of an ICO can vary greatly from minutes to days and months. In addition, often the crypto tokens purchased during the ICO will be locked for a predetermined period of time until they can be sold. However, this is not always the case, and the blocking time depends on the duration. As with buying shares in an IPO, if an investor is allowed to sell their crypto tokens, they can do so on the exchange.

What does the future hold for us?

The way companies raise capital through investor funding has changed in recent years, for example through crowdfunding campaigns and ICOs. As far as we know, IPO financing for companies may well be a thing of the past sooner than we think. ICOs have numerous advantages over IPOs such as wide reach, efficiency, decentralization, and great interest. While there are negative aspects to ICOs that don’t have an IPO, these things will soon be worked out with the advent of regulation and growth in the industry. Overall, the future for ICOs looks bright.