What is an ICO?
ICO stands for Initial Coin Offering which is a token sale carried out by crypto startups in order to raise funding for their project. Most of the time, a company launches the ICO before they release the coin for trading on any exchanges. There are currently thousands of ICO projects on the market, crypto companies raising more than $5 billion in 2017 alone, showing just how popular this funding model has become in the blockchain world.
But, these funding campaigns are not designed to support traditional fiat currencies. Instead, these campaigns accept only established cryptocurrency, usually Bitcoin (BTC) or Ethereum (ETH). In exchange, the investors receive ownership of the newly created token created by the ICO, which will, later on, be available for trading on a public exchange.
What is an IPO?
An Initial Public Offering, otherwise known as an IPO, is when a privately owned company is in the process of becoming a public one, by listing its shares on a stock exchange.
This process is carried out by a private company so it can expand and become publicly traded. There are more formalities involved in the process of acquiring stakes.
Investors are able to sell their shares at any point, with the value of those shares being derived from how well the company performs financially.
ICOs vs IPOs: Differences
While an ICO is similar in some way to an IPO, there are more differences than the involvement of digital currency instead of fiat. Below we shall take into account the crucial distinctions between the two offerings.
The Fund Raising Method
The transition from a private company to a public entity is a highly rigorous process, which requires applications that must follow a set of regulatory rules. This involves an independent audit, past financial performance analyses and, lastly, the approval from the Securities and Exchange Commission if the IPO is allowed to go on any further.
ICOs, on the other hand, are completely the opposite; there are no restrictions regarding who can organize one- all that’s required is a website and a whitepaper. A crypto company sets the amount of money to raise and because the market is still largely unregulated, it can carry on without having to go through the processes for IPO launches.
When private companies start their public offering, investors buy shares using fiat currency such as US dollars, euros or yen. This, in turn, lets the company access its capital once the offering is completed.
ICOs, however, cannot accept or get involved with fiat currency, due to regulatory restrictions. Instead, they most commonly accept either Bitcoin (BTC) or Ethereum (ETH) for their tokens. These coins are subsequently traded for fiat money on an exchange, which allows the crypto company to use the funds that it has raised.
When investors buy shares in an IPO, they buy a stake in that company. Ownership of those shares also gives them voting rights proportionate to the number of shares they’ve acquired, and they could also be entitled to receive dividends.
When it comes to ICOs, investors do own any stakes in the business that carried out the sale. The token they’ve bought fluctuates in price influenced by the movement of the market, but they don’t have any kind of ownership of the company that launched the ICO.
The strategy which an ICO employs is that of raising money for the project and then enter the market. That’s why most companies in this segment are startup companies that are looking to get their project from the ground.
On the other hand, an IPO is usually carried out by a company that has already reached financial stability and wants to expand as well as to make itself available to the public. The raise money is used for the future company project developments.
The process of issuing an IPO required that the company create a legal document called prospectus. This document is a legal declaration that has to present important information regarding the company and the IPO, and must have some degree of transparency.
On the other side, ICOs do not have to present any legal document. The document they put out is called a whitepaper which describes the project and its purpose. But, the major difference here is that, while ICOs are not obligated to have a whitepaper, IPOs must have the prospectus.
An IPO can last up to 6 months due to the legal processes which are required. The length of an ICO campaign is much shorter which depends on the nature of the project.
When a company issues a whitepaper and a smart contract, they can begin their crowdsale. The time interval of a crowdsale depends on the project and its maximum hard cap, but it usually lasts 1 month or so.
IPOs are heavily regulated and scrutinized, so it is highly unlikely that the company is involved in illegal activity. Investors have the certainty that regulators have done their job to ensure the legitimacy of the organization before they list their shares.
Unfortunately, ICOs do not come with such guarantees. A majority of crypto projects are just scams, with the company just using the token sale to make quick money and afterwards leave with the funds.
The main similarity between ICOs and IPOs is that they are ways through which companies can raise funds. IPOs are heavily regulated, while ICOs are not. Because of this, the latter type of offering can only be applied to the crypto and blockchain space.
Even though ICOs are currently unregulated, more and more governments are starting to look for ways of implementing regulations for this industry segment