An initial coin offering, popularly known as ICO is a type of capital-raising activity in the cryptocurrency and blockchain environments.
The ICO is similar to an initial public offering (IPO) that uses cryptocurrencies. However, it is not the most accurate comparison because there are some significant differences between the two fundraising activities.
What Is Initial Coin Offering(ICO)
The Initial Coin Offering (ICO) is a creative solution to raising funds through the use of digital currencies (cryptocurrencies). To investors, an initial coin offering (ICO) is similar to an initial public offering (IPO) in the stock market (IPO). An organization in the process of raising funds to support a new project will launch an ICO to assist with funding.
Investors who participate in an initial coin offering will receive a new cryptocurrency token issued by the company. In an offering, interested investors can purchase new cryptocurrency tokens created by the firm. In the case of this token, it could mean that it can be used to access the firm’s product or service, or it could represent a stake in the company or project.
Initial Coin Offerings are typically used by businesses to raise funds, such as when they want to get in on the ground floor of a hot industry. ICO trading platforms allow investors to exchange their cryptocurrency tokens for the tokens they originally invested in the firm. It uses crowdfunding to finance project development by creating and selling digital tokens.
How ICOs Work
An initial coin offering is a complex process that necessitates extensive knowledge of technology, finance, and the law. The main idea behind ICOs is to use the decentralized systems of blockchain technology to raise capital in ways that align the interests of various stakeholders. The following are the steps in an ICO:
1. Identification of investment targets
Every initial coin offering begins with a company’s desire to raise capital. The company determines the target audience for its fundraising campaign and develops materials about the company or project for potential investors.
2. Creation of tokens
Token creation is the next step in the initial coin offering process. Tokens are essentially blockchain representations of an asset or utility. Tokens are both fungible and tradeable.
Tokens are not to be confused with cryptocurrencies because they are simply modifications of existing cryptocurrencies.
Tokens, unlike stocks, do not typically provide an equity stake in a company. Instead, the majority of the tokens give their owners a stake in a company-created product or service.
Tokens are generated on specific blockchain platforms. Token creation is a relatively simple process because a company is not required to write code from scratch, as with the creation of a new cryptocurrency. Instead, existing blockchain platforms that run existing cryptocurrencies such as Ethereum allow the creation of the tokens with minor modifications of the code.
3. Promotion campaign
A company will typically run a promotion campaign to attract potential investors at the same time. It should be noted that campaigns are typically carried out online in order to reach the greatest number of investors. However, several large online platforms, including Facebook and Google, currently prohibit the advertising of ICOs.
4. Initial offering
Following the creation of the tokens, they are made available to investors. The offering may be structured in several rounds. The company can then use the Initial Coin Offering proceeds to launch a new product or service, while investors can expect to use the acquired tokens to benefit from this product/service or wait for the tokens’ value to appreciate.
Types Of ICOs
Initial coin offers fall into two general categories:
Private Initial Coin Offering
The number of investors who can participate in public token offers is strictly limited. Private ICOs can only be conducted by accredited investors (typically financial institutions and high-net-worth individuals), and a firm can set a minimum investment amount.
Public Initial Coin Offering
A public initial coin offering is an example of crowdfunding in the public sector. Because there are no requirements to invest in public offerings, they are an accessible way for the general public to participate. However, given government regulations, private ICOs are a more viable option.
People are becoming more interested in ICOs as cryptocurrencies and blockchain technology gain popularity. Aside from those two broad categories, you may come across the following ICOs while browsing the coin markets:
Security token offering (STO): A security token offering is most similar to an IPO because the coin acts as a share of stock. These are heavily regulated by the SEC.
Interactive initial coin offering (IICO): An IICO is a type of ICO where there is a limit on how much each investor can buy. This ensures more people can participate.
Initial supply auction: An initial supply auction is a strategy of releasing a coin by setting a high initial price and lowering it until an active market price is achieved.
Simple agreement for future tokens (SAFT): With a SAFT token, initial buyers are protected by a contract that gives the token a future use case. These are quite risky, as it’s the equivalent of investing in a pre-revenue startup.
Airdrop: Cryptocurrency airdrops are a fun way to pick up new coins. With an airdrop, the company gives away a small number of coins for free to help seed a new market.
What is an ICO Launchpad?
ICO Launchpad is a platform that gathers all relevant information about ICO projects in order to assist investors in selecting the best one. It is analogous to a central market that functions as a marketplace for buyers and sellers. As a result, fundraising, consulting, marketing, and receiving technical assistance may become easier.
Launchpad is widely used by ICO crypto launchers and project owners, such as Binance Labs, Huobi Prime, OKEx Accelerator, Bitfinex Pulse, and others in 2022. These platforms’ popularity stems from their ability to raise funds for a wide range of projects while also building a large user community.
Most importantly, every project owner must go through an ICO Launchpad screening process. The criteria may differ, but they all consider the feasibility of the project, the target audience, and a variety of other important factors. If the project is approved, the platform will provide marketing, technical support, and fundraising assistance.
What is an ICO Token?
An ICO token refers to the coins released from the project owners in the ICO fundraising for the investors to buy. In return, they receive benefits from the project.
Those interested in investing in ICO tokens have the same goal to raise funds and reap the benefits. When there are fundraisings in many different currencies, the investors will receive each of the project’s ICO tokens.
In short, the idea of ICO tokens is similar to a share certificate of a company. You could earn special offers, benefits, or rewards from that project which depends on the details written in the Whitepaper.
What is an ICO Portal?
The ICO Portal helps investors reduce the risk of fraud by screening ICO projects.
The ICO Portal provides general investors with digital tokens. The main goal of ICO Portal, on the other hand, is to screen those who want to issue the ICO, analyze the business plans, and check and verify that the source codes match the information disclosed in the whitepaper, in addition to getting to know the investors for risk assessment.
ICO vs IPO
ICO and IPO share very similar fundamental principles, but they also have a few differences. The most significant ones between an IPO and an ICO are how they are reviewed, and verified by the SEC. The further details are as follows.
Note: An IPO stands for an initial public offering. It is similar to the ICOs, but the tokens are offered by private companies to the public.
- Typically, an ICO begins with business plans, ideas, and theories. As a result, there is insufficient business data to calculate business balance sheets.
- When an ICO is launched in a country, such as Thailand, the ICO portal becomes even more important. According to SEC rules, retail investors are not permitted to invest more than TBH 300,000 or US$ 8,458 per project with less than four times the amount that the ICO issuer offers to retail investors, or more than 70 percent of the total offering value, whichever is greater.
- The Whitepaper of an ICO provides information to investors. There is also an ICO Portal that regulates and checks Smart contracts to ensure the investors before making the decision.
- IPO will be protected under the Securities and Exchange Act and there are regulations both before and after the offering.
- IPOs have the mandatory investment prospectus announced to the public
Fundraising is an essential component of any business that requires a large amount of capital. An ICO is a fundraising tool that plays a role and meets the needs of cryptocurrency investors. However, investors must thoroughly understand and research these tools. I hope you found this information useful; please let me know in the comments section.