What is an ICO?
The cryptocurrency space is full of innovations and one such revolutionary innovation which has fundamentally changed how companies raise funds is called an ICO – Initial Coin Offering
As the name suggests, in an ICO, companies issue a token to the investors who believe in the project and raise money in return. It is different from an IPO as the companies don’t really dilute their equity in any way and the leaders can still control the decisions of the organization. However, there is one similarity – the investors of an ICO and an IPO both buy the token/shares hoping that their value will appreciate in the future.
It is to be noted, however, that comparing stocks, which are securities, with tokens does not mean that they are also securities. We discuss more on this later.
The first ICO was done in August 2013 by Mastercoin which was later renamed as Omni. It successfully raised $5 million in Bitcoins. Since then, a wave of ICOs has hit the global economy.
Reportedly, ICOs raised more in the first three months of 2018 than they raised in the while of 2017. The exponential growth of ICOs is clearly evident from this fact. Other successful ICOs include Ethereum($18 million), Iconomi($10 million), Golem($8 million) and Waves($16 milion).
What has lead to this tremendous growth of ICOs? One of the main causes of this is the rise of Ethereum and ERC20 TOken Standard, which gives pre-defined rules for defining the behavior of new tokens.
The ERC20 Token Standard along with smart contracts helped developers make their own tokens and make them instantly available in all exchanges and compatible with almost all wallets which supported Ethereum.
Singular DTV, Augur, GOlem, Digix DAO are all examples of projects that created their token using this technology and conducted successful ICOs.
ICOs have tremendous advantages for companies. As mentioned earlier, there is no equity dilution in the case of ICOs which means the control of the company still lies in the hands of its creators. ICOs are also a faster way of raising funds as there are no strict regulations as such which helps to avoid bureaucracy and red tapism. Last but not the least, an ICO is not limited by the bounds of the nationality of the company. It is truly a global way of raising funds wherein people can invest in ICOs of companies operating on the other side of the world.
While ICOs are cherished by investors and entrepreneurs, the legal aspect and regulations are worth considering.
Like any new tech, it has its proponents and antagonists. The antagonists believe that companies raise an unregulated amount of capital with ICOs which is unjustified. Recently, the U.S Securities and Exchange Commission started discussing whether the tokens sold during ICOs classify as securities. The SEC uses the landmark case as a test which is called the Howey Test. Any token which passes this test is a security which implies that ICOs which did not register with SECs would be immediately declared illegal.
As of now, the SEC has cleared that Bitcoin and Ether are not securities but other tokens can be. We are still skeptical about the future of other coins and the subsequent regulations that come up with ICOs as it could make the easy process even more cumbersome.
Looking at the current state of ICOs one has to be really careful while investing as the industry can lead to monumental profits but also hard-to-bear losses. If you would have participated in the Ethereum’s ICO, you would have more money than you know what you can do with. However, if you invested in an ICO which promised a lot but ran away with your money, like Onecoin, you’re actually doomed.