What is ICO?
The ICO abbreviation stands for Initial Coin Offering, meaning the initial coin (token) placement. In the course of an ICO campaign, a project team sells out digital tokens for cryptocurrencies or fiat money among investors. Later on, the project platform uses such coins as an internal currency or trades them on foreign exchange markets. The term “crowdsale” has also found its frequent use instead of ICO.
Why do projects conduct ICO campaigns?
Emitting their own tokens and exchanging them for popular cryptocurrencies (e.g., Bitcoin or Ethereum) or for fiat currencies (like dollars or euros), a project raises funds necessary for its launching procedures or development. As a rule, projects carry out an ICO campaign on their early stages, prior to the creation of their full-fledged infrastructure. The funds raised are meant to finance the final stage of development and marketing communications or to be directed to special development funds to support projects in the long-term future.
What is the ICO campaigns legal status?
As of today, ICO is neither a legal nor illegal way to raise investments. No country in the world has currently defined its legal nature, campaign procedures, or requirements for companies which are going to raise funds using ICO. In addition, the legal status of relations arising during ICO campaigns is also difficult to determine because it is hard to name such relations financial in their classic sense. At the same time, we can certainly say that this process is based upon the reputation of people involved in the respective cryptocurrency startup, as well as upon the users’ (potential investors’) confidence.
Are ICO and IPO comparable?
When a company chooses to offer its shares to the general public, it carries out an IPO (Initial Public Offering – initial share placement on a stock exchange). ICO can operate in a similar way: investors spend their funds and receive a company’s “share” in the form of cryptographic tokens. Moreover, ICO has common traits with crowdfunding when funds are raised to implement a specific idea, actually, at a stage when the project is still far from possessing a completed product.
However, IPO is subject to national legislation. For instance, to publicly offer its shares, any US company has to be incorporated as a joint stock company registered with the US SEC (Securities and Exchange Commission). All these proceedings make the fundraising process more complicated especially at an early stage of the project development. Nevertheless, they provide certain guarantees to investors.
In the case of ICO, the fundraising process is much easier, but users’ investments are not anyhow secured.
Why ICO attracts investors?
Purchasing tokens offered during ICO campaigns, investors, first of all, anticipate:
- to make a profit from selling them at a higher price in the future (Ethereum is a classic example – its tokens cost less than one cent during the ICO campaign in the summer of 2014, and nowadays, their price has reached almost $400);
- to use tokens for their intended purpose – receive contracted services at a lower price.
What are the risks within the ICO campaign?
Usual fraud, perhaps, is the largest risk. That is the case when the project founders pursue a single goal: to misappropriate users’ money. Moreover, since laws regulating cryptocurrency crowdsales do not exist at the moment, such kind of transaction is always based on trust from the investor’s perspective. Never rule out the possibility that a project may collapse before its product appears, or it may disappoint the investor with its implementation processes.
Furthermore, ICOs, as they are today, are usually one-round campaigns with very slim chances to receive any additional funding. This fact can also be considered as a potential risk in regard to the long-term project implementation.
What to pay attention to before participating in the ICO campaign?
A great number of different ICOs can confuse a lot of inexperienced investors. That is why it is necessary to carefully understand the sale agreement terms (Token Sale Agreement) in the first place. While reading this document, you can come across some curious details which the ICO campaign administrators may have failed to publicly announce. Moreover, there are some implicit indicators helping to recognize conscientious projects:
- all necessary agreements and rules are available in a public offer published on the website
- ready working prototype
- skillfully composed whitepaper and all the other documents
- escrow availability (it is a special account which lists property, documents, or financial assets before certain circumstances occur or certain liabilities are performed)
- incorporation (registration) of the company itself
- spotless reputation of people involved in the project
You can find more details about ICO legal aspects here.
What are the examples of the most successful ICO campaigns?
A successful ICO campaign is a rather relative notion. Nevertheless, the amount of raised funds is considered to be a generally accepted marker. In this regard, the Bancor project, which collected 396,720 ETH in less than three hours in June 2017, holds the leading position at the moment (we are talking here about pallid statistics, skipping other possibly controversial aspects of these campaigns). An innovative browser Brave can serve as another example of a dynamic crowdsale: within about 30 seconds, the project succeeded to achieve its financial goal and raise $35 million.
In May 2017, the Storj ($30 million in less than a week) and Aragon (within just 15 minutes after the ICO had started, the project collected the planned 275,000 ETH – about $25 million) projects entered a list of successful cryptocurrency crowdsales.
We can also mention such projects as mobileGo ($53 million), Gnosis ($12.5 million within 10 minutes), Blockchain Capital ($10 million within two hours), Aeternity (23.4 CHF) and, finally, the Status project (about $100 million) which resulted in the Ethereum network failure.
It is also worth mentioning the DAO project which has already become part of the cryptocurrency world history because its failure led to Ethereum Classic appearance in the summer of 2016.