What is Initial Coin Offering (ICO)?

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An ICO process is similar to the traditional Initial Public OfferingInitial Public OfferingAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more (IPO) concept, whereby companies sell their shares publicly, making investors pay for the securities. The investments raise company capital using which the projects are funded.  However, unlike the IPO, ICO investors do not acquire ownership through investing in the company.

Key Takeaways

  • Initial Coin Offering (ICO) is a blockchain-based financial process for raising capital to finance new project ideas.It involves selling coins or tokens to investors in return for digital payments.Investors benefit from tokens as it provides access to the company’s product or service in advance.To start an ICO, a company must release a whitepaper outlining the details related to the offering.Though highly profitable, ICOs come with high risk as they are mostly unregulated.

Initial Coin Offering Explained

The Initial Coin Offering (ICO) is the process through which companies or entrepreneurs can obtain funds by issuing cryptocurrenciesCryptocurrenciesCryptocurrency refers to a technology that acts as a medium for facilitating the conduct of different financial transactions which are safe and secure. It is one of the tradable digital forms of money, allowing the person to send or receive the money from the other party without any help of the third party service.read more to finance their new projects. ICO was introduced in 2013 by J.R. Willett, the founder of Mastercoin (now Omni).

Using ICO, companies sell tokens created using the blockchain technology to investors in return for legal currencies or other cryptocurrencies like BitcoinBitcoinBitcoin is a digital currency that came into existence in January 2009, speculated to be created by Satoshi Nakamato, whose true identity is yet to be authenticated. It provides lower transaction fees than the traditional online payment systems, is controlled by the decentralized authority, and is not like government-issued currencies.read more. The proceeds from the ICO are thus used to launch their new projects. The tokens issued to investors become a functional currencyFunctional CurrencyThe term functional currency represents the currency of the location in which business operates primarily, earns a significant portion of revenue, and incurs the cost to generate such profits. In short, it is the home currency of that country where the corporate headquarter is situated.read more unit when the development of the product or service as part of the new project is complete.

When a company is ready to offer an ICO, it announces the initial coin offering list, the date of launch, rules to follow, and specifics well in advance in a whitepaper. This helps investors to decide and be ready to buy the tokens in exchange for cryptocurrencies on the said date.

As soon as the investor buys the ICO, the money paid goes to a specific compatible crypto wallet address, and investors receive the tokens purchased in return. The token is either connected with a particular project of a company or constitutes its share. It can also be the shares in proceeds yet to be realized or of no recognizable value at all.

ICOs can be highly profitable if everything falls in place. However, they might also lead investors to trouble at times. It remains unregulated in most cases. As a result, there is no rule to stop companies from running away with investors’ money.

Thus, investors must search for an initial coin offering platform regulated by some authentic authorities. Once they feel confident about the authenticity of the involved cryptocurrency dealings, they can decide whether to invest or not.

Initial Coin Offering (ICO) Types

An ICO regulator may either classify the token offering as an underlying service of a company or a security to trade. If the token is offered as a service, an ICO requires issuing a whitepaper detailing the nature of the business, its structure, purpose, objectives, etc.

Alternatively, if issued as a security, an ICO needs to undergo proper registration and meet other regulatory requirements. Therefore, some ICOs are registered with and regulated by the U.S. Securities and Exchange Commission (SEC).

ICO is classified into two types – Private and Public.

  • A private ICO can only have a small number of investors, mostly accredited ones. The accredited investorsAccredited InvestorsAccredited investor refers to a person who has been granted special status under financial regulation laws, allowing him to trade in securities that have not been registered with the regulatory authorities, and it usually involves high-net-worth individuals, brokers, trusts, banks, and insurance companies.read more can either be a financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more as a whole or a high net-worth individual. They can participate in the ICOs with the company offering them a set price.A public ICO, on the other hand, refers to crowdfundingCrowdfundingCrowdfunding refers to how the business can raise capital from many individuals beyond friends, family, relatives, and customers by posting the project details on websites and other social media platforms. read more that is open to all. Anyone around can be an investor. However, given the safety and regulatory concerns, private ICOs are gaining more momentum than their public counterparts.

Example

While Ethereum (CRYPTO: ETH) and Solana (CRYPTO: SOL) are two of the most popular and profitable ICOs in the industry, the one that has been gaining eyeballs recently and is on the watchlist in 2022 is NAGA (CRYPTO: NGC). NAGA is a German fintech company offering an investment app with a social network for traders. It allows traders to copy and follow popular traders and, as a result, learn and grow. 

The NGC token was launched in December 2017 in partnership with the NAGA Group post raising funds worth $50 million as part of an ICO. The cryptocurrency is valued at a market capMarket CapMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more of $103 million, with the price of one NGC token reaching $1.31 in 2022, which is way more than $0.0286 as recorded in January 2020. 

ICO vs IPO

As already stated above, ICO and IPO are equivalent terms with similar nature but different offerings and exchange options. 

This has been a Guide to what is Initial Coin Offering (ICO). We explain ICO using cryptocurrency along with its list, platform, examples and its difference from IPO. You can learn more from the following articles –

ICO is a means of acquiring funds for new projects using cryptocurrencies. Companies sell tokens developed on blockchain platforms to investors in return for other cryptocurrencies. These tokens offer investors utility in the company’s yet-to-be-created product or service or the blockchain platform. An ICO is similar to the traditional Initial Public Offering (IPO) concept, whereby companies sell their shares publicly, making investors pay for the securities.

The ICO remains unregulated in most cases. As a result, there is no rule to stop companies from running away with all investors’ money. However, some ICOs are registered with and regulated by the U.S. Securities and Exchange Commission (SEC).

Under the Initial Coin Offering (ICO), the company looking to raise capital for a new project announces the initial coin offering list and other details related to the buying process. Interested investors invest in the project in exchange for crypto financial assets or tokens. Investors must open a special account on the blockchain platform to buy the tokens. After that, they can transfer the tokens to any account on the blockchain platform.

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