If you spent the last 6 months watching at Initial Public Offerings (IPO) only, you missed out a huge trend. More and more startup teams – who develop software for blockchain platforms – decide to raise capital through an initial coin offering (ICOs).
What is an ICO?
An ICO stands for Initial Coin Offering. The principle is comparable to an Initial Public Offering (IPO) but without any financial regulation. In fact, the ICO is more or less a crypto equivalent of an IPO. Companies who are raising money through an ICO are selling their shares for equity.
What is an ICO used for?
An ICO – like an IPO – is used to gain access to capital by selling shares to the public. Therefore an ICO is interesting for startups who wish to skip raising private equity – such as venture capital – in order to finance their business. Sometimes an ICO is also called and IPCO or Initial Public Coin Offering.
What about Regulation?
ICOs – like cryptocurrencies – aren’t regulated according to any public law. This might be an advantage for cryptocurrency and blockchain startups who can skip the rigorous and complicated capital-raising process by venture capitalists, banks, or IPOs. On the other hand – as ICOs are decentralized and unregulated – there is no legal protection for investors. While public companies are regulated by – for example – the Security Exchange Commission, there is no such regulation for public crypto companies. This means investors should be careful as some ICOs are actually fraudulent. If you fund a fraudulent ICO you will never see your investment bank.
Are there different ICOs?
Today in 2017, initial coin offerings have two different purposes. They are either used to create or finance the development of a new alt coin, or they are used to back a new project or company by raising equity through a crypto crowdfunding.
How does an ICO Crowdfunding work?
Initial coin offerings were born when Ethereum developed and introduced smart contracts. A smart contract is basically a self-executing and self-enforceable contract based on a blockchain. When people want to back an ICO they register on the platform they would like to back. Then they send ETH (Ether) to a specially assigned wallet address. After the ICO ended the crypto tokens will automatically be distributed to the correct owners.
High-Risk Venture
ICO investments are like early stage investment high-risk investments with a possible extremely high reward. When investing in a crypto ICO your investment can skyrocket and more than double in just some minutes. On the other hand – as it is the case with penny stocks – it may be that you don’t even get a single satoshi out of your investment.
