Initial Coin Offering (ICO): Meaning, Types and How it Works
Initial coin offering (ICO) is the process of raising capital for a new crypto project. This event is equivalent to a company’s IPO or initial public offering on the stock exchanges. The only difference is that ICO uses cryptocurrency to raise money.
New age digital companies having a large reserve of crypto coins can sell it to raise money for their organisation. In an ICO, investors receive cryptocurrency in exchange for their funding.
Continue reading if you wish to know more about ICO fundraising.
What is ICO or Initial Coin Offering?
Start-up companies dealing in cryptocurrencies launch an ICO to gather funds from prospective investors. This fundraising exercise offers dual benefits to the company; first, it raises the much-needed initial funds for them and second, it allows them to create a user base for their product.
The initial offering gives utility value to its buyers and encourages them to participate in the company’s crypto ecosystem. Investors who take part in an ICO can sell the cryptocurrencies at any crypto exchange or convert the same into fiat currency.
However, the ICO market is unregulated, and hence it is prone to several risks. Investors must be cautious while taking part in these events. Now that you are aware of what ICO is in crypto, let’s move to its working and other aspects.
How Does an ICO Work?
Companies planning to take part in an ICO formulate rules, the date of ICO as well as the number of tokens up for sale well in advance. They engage in extensive campaigning mainly through social media networks to apprise potential investors about the sale.
ICOs generally accept payments in other major digital currencies. Bitcoin and Ethereum are the two most common virtual currencies accepted as payment. However, many ICOs also accept legal or fiat currencies as well.
Buyers need to register on the company’s platform and provide the address of their crypto wallet in which these coins will be credited. There are three ways in which an ICO functions:
- Some companies keep the price and volume fixed. Under this, they offer limited tokens at predetermined prices.
- The second way is keeping the volume of tokens fixed, but the price is flexible. The company decides the price on the basis of the total amount received. For example, if the company has raised $5 million by selling 20,00,000 tokens, then the price of each token comes to $2.5.
- The third type involves keeping the price fixed, but the volume is variable. Under this, the company will keep selling tokens to as many people as possible until the ICO round closes.
Also Read: Ankr Coin Explained: How To Use and Buy It On Decentralised Ankr Platform?
How are Initial Coin Offerings Regulated?
The level of regulation of an ICO depends on the country in which it is taking place. Generally, as of now, these come under unregulated activities across the globe.
In India, a securities listing is under the overall legal framework of SEBI; however, ICO is not regulated in India.
There are some countries like China, Macedonia, and Ecuador that have strict regulations regarding crypto transactions and have completely banned these fundraising exercises.
However, there is a growing chorus among the digital currency community that ICOs must also be considered as a security listing and should be regulated.
What are the Types of Initial Coin Offering?
Here are the two types of ICOs that are most prevalent at the moment:
1. Public ICO
Under this type of fundraising exercise, companies offer their tokens to the general public or retail investors. It is a democratic way of crowdfunding and focuses on the masses with an aim to increase the user base of tokens.
2. Private ICO
The private initial coin offering is available to only a few investors. Usually, this type of exercise is restricted to large financial institutional investors and high net worth individuals. This activity generates a large amount of capital and gives decent marketing to the company.
The company fixes the total amount they wish to generate from a private ICO and targets potential investors through meetings, presentations and conferences. Telegram, the instant messaging application, launched a private ICO in 2018 and raised more than $1.7 billion from qualified investors. Back then, it was the largest round of funding in the cryptocurrency segment.
What are the Advantages of ICO?
Some advantages of ICO are as follows:
- Investing in ICO can be a very profitable venture. If you choose the right ICO based on in-depth market research and stay invested for a long time, you may receive substantial high returns.
- Most of the ICOs are open to any person, company or cooperative. Hence, an ICO is inclusive and more accessible when compared to other types of investment like IPO.
- With less regulation, these are a very efficient and simple way of raising funds for organisations.
- Taking part in an ICO will give you the early mover advantage. You have a chance to purchase these coins at a very low price and trade them at any crypto exchange when their price increases.
What are the Disadvantages of an ICO?
Cons of participating in an ICO are as follows:
- Cryptocurrencies are not backed by any valuable asset. This makes them a speculative entity which comes with high risk. There have been many instances of start-ups launching virtual currencies whose value gets eroded over time, with investors incurring heavy losses.
- As these offerings are not regulated, they have become a breeding ground for white-collar crimes. Fraudsters can run away with investors’ money without giving them any valuable return.
- Investors do not have any prior record or information available about these coins. Therefore, one must have in-depth knowledge about the workings of crypto markets to be successful in these coin offerings.
What are the Examples of an Initial Coin Offering?
Some of the most prominent ICOs are as follows:
- Ethereum token’s initial coin offering was launched in 2014. It raised approximately $18 million over a span of 42 days.
- Another company Antshares launched its ICO in 2015 in two phases. On completion of the second phase in September 2016, it had raised close to $4.5 million. When its second phase was launched, the company’s management decided to rebrand Antshares as Neo.
- In March 2018, Dragon coin also launched its ICO and raised funds to the tune of $325 million.
- EOS had raised a record breaking amount of $4 billion during its yearlong ICO, which started in 2018.
Stock IPO Vs. Cryptocurrency ICO
Some key differences between an IPO and an ICO are as follows:
| Parameter | IPO | ICO |
| Regulatory | Companies have to follow strict guidelines and complete formalities before launching IPO. | It is unregulated and does not mandate any specific guidelines. |
| Time horizon | It is a complex process and requires detailed planning and analysis. Therefore, it takes significant time to launch an IPO. | An ICO can be launched in a short span of time, depending on the company’s requirements. |
| Members involved | The company management, lawyers, and merchant bankers are involved in the process. | Only the developers and programmers are involved. |
| Mode of investment | You can participate in an IPO either through an online or offline mode. | You can take part in ICO only through the online mode. |
| Ownership | In case of an IPO, you become a shareholder of the company by acquiring shares of that company. | In an ICO, you do not become owners of the company as you receive cryptocurrencies for your investment. |
| Profit | After becoming a shareholder, you are entitled to profits and dividends of the company. | You will not be eligible for any dividend and share in profits. |
| Document | Companies need to file a document with regulatory authorities named draft red herring prospectus before launching IPO. | Start-ups need to file a white paper only. |
How to Launch an ICO?
In order to launch an initial coin offering, one needs to create a cryptocurrency using a blockchain network. After that, he/she must decide the date of its launch and guidelines or rules for participating in the process.
Additionally, every company wanting to launch the ICO must file a white paper outlining the objectives of the company and the future outlook of tokens associated with it. One must indulge in a heavy marketing strategy using various social media tools to garner as much attention as possible.
Apart from all these, one must also have a dedicated team of professionals who understand the working of this ecosystem and are determined to take this project forward.
Also Read: What is ApeCoin (APE) and Should You Consider Investing in it?
Final Word
Initial coin offeringallows new-age start-ups operating in cryptocurrencies to fulfil their funding requirements. Investors also get an opportunity to earn profits by acquiring these coins at an early stage and selling them when their price increases. However, investors taking part in an ICO should conduct a thorough analysis of the company offering them before putting in their money.
FAQs on ICO
Ans. You can buy coins in ICO by following these steps:
Step 1: Register on the platform which is launching the initial coin offering.
Step 2: Transfer the requisite digital or fiat currency to the platform.
Step 3: Select the number of tokens that you wish to buy.
Step 4: Place the order for the coins. The shares will be transferred to the crypto wallets of the investors upon successful completion of the funding round.
Ans. As ICOs are unregulated, there are no measures in place that can safeguard investors’ money and interests. Thus, there are chances of investors incurring huge losses in case the ICO fails to attain its objectives.
Ans. The digital currencies in India are subject to taxation at a flat rate of 30% on the total gains or proceeds. This taxation system has been applicable from April 1 2022.
Ans. Founders of crypto companies launch a white paper which is a vision document outlining the objectives of raising the fund and how the company intends to use the same. It will also contain other information like the tenure of an ICO as well as the eligible modes of payment.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.Before you go…
