Authentic, unique, and creative ideas, experienced, driven, and disciplined team members, and deep accurate market expertise are the cornerstones of business success, but they can all go to waste or end in a failed project if one important component is missing: funding.
What is an Initial Coin Offering (ICO)?
An initial coin offering (ICO) is a kind of fundraising that leverages blockchain technology. The concept is sometimes referred to as the cryptocurrency equivalent of an initial public offering (IPO), and the process raises funds for startups by using digital assets (tokens and cryptocurrencies) and, in most cases, crowdfunding. Although an ICO is more typically utilized to generate funding for crypto startups, non-crypto enterprises may also adopt the technique through tokenization.
A Blockchain Alternative to Fundraising And The ICO Craze
The advent and early adoption of cryptocurrencies enabled initial coin offerings. Mastercoin launched the first successful ICO in 2013, followed by another notable ICO launch in 2014 by Ethereum, when a total of 50 million either tokens were sold at $0.311 each to raise approximately $18.3 million (which was 31,000 BTC at the time).
Despite this seeming grandeur, the actual breakthrough for ICOs occurred in 2017 when a slew of start-ups launched successful launches that raised significant funds and expanded the ICO market. Brave, a popular web browser, raised $35 million in just 30 seconds. According to Statista data, total token sales from ICOs exceeded $6.4 billion by the end of the year, signifying a more than 3000% growth from the end of 2016.
The craze did not end there though; by the end of the first quarter of 2018, ICO total sales had already eclipsed that of all of 2017, hitting $6.8 billion, with Filecoin raising $257 million in a single ICO. ICOs quickly replaced venture finance as the leading fundraising method for blockchain firms. This most successful ICO till date was launched by Telegram, a prominent UK instant messaging company that raised nearly $1.7 billion in a private ICO. Other notable top ICO debuts with the greatest sales include Filecoin, Tezos, Bancor, TenX, Kik, and Brave.
While these figures are impressive and intriguing, they do not tell the entire story. Most companies that had ICO launches the previous year had already failed as of February 2018, and the form of funding has already left a highway trail of failed projects, little to no return on investment (ROI), fraud, and a lack of accountability and regulation.
Elements of an ICO
Initial coin offerings have been compared to initial public offerings. The concept however has distinguishing characteristics that set it apart from traditional fundraising approaches as well as other crypto-related funding techniques.
The major distinguishing feature of an ICO is that it is powered and backed by blockchain technology. Startups that intend to employ this fundraising method must build their own networks or build on existing blockchains like Ethereum, where new tokens can be created with only minimal code modifications.
Furthermore, because smart contracts are such an important element of the ICO process, they must be carefully written and effectively implemented. The smart contract automates transactions such as token purchase, wallet connection, and token trading. All of these necessitate complicated processes and solid infrastructure to ensure a sound and secure project as well as a seamless ICO launch and completion.
The exchange of funds from investors for a valuable crypto asset is the basis of an ICO. Tokens are assets that can interact with the blockchain, and as such, tokenization is essential for an ICO to take place. Traditional businesses can develop tradable digital assets to represent certain products or services on the blockchain. Tokens must also be created by crypto-native businesses to meet their specific function or nature of business.
Tokens can be classified into four types:
- Utility: Utility tokens provide holders with access to and enjoyment of exclusive products and services.
- Governance: Governance tokens provide holders with voting rights and enable democratic governance of the company or ecosystem.
- Investment: Investment tokens provide holders with a share in the firm as well as the ability to collect dividends when the company earns a profit.
- Asset-backed: Asset-backed tokens indicate the holder's ownership of an asset, whether digital or physical.
The category of token most suited for the company's purpose is vital and must be decided and correctly specified at the startup's conception because it will affect investor interest, token growth, legal ramifications, and other variables throughout the project life cycle.
No Third-party Involvement
Unlike traditional fundraising methods, ICOs do not necessitate the involvement of intermediaries such as venture capitalists, banks, financial institutions, or other agencies. In a global cryptocurrency market that is not limited by time or location, capital is raised directly from crypto investors all over the world. There are no institutional or human gatekeepers who can limit money inflows, slow down ICO launches, or interrupt multiple investment rounds.
Types of ICOs
Most initial coin offerings are open to the public, however ICOs can also be done privately, as demonstrated by the $1.7 billion Telegram ICO round.
- Public ICOs: Public initial coin offerings (ICOs) are open fundraising rounds that include general public investors. It is a type of crowdfunding in which interested investors from all around the world finance blockchain startups.
- Private ICOs: These initial coin offerings are conducted behind closed doors with a predetermined or limited number of investors. In this case, the company normally establishes a minimum investment amount and restricts the ICO to only recognized and certified investors, such as wealthy individuals, financial institutions, and other blockchain companies.
ICOs And Regulations
Several governments have already issued guidelines outlining how to conduct ICOs in their territory, as well as laws in place to regulate the process. Australia, New Zealand, Hong Kong, and the United Arab Emirates (UAE) are among these countries. Other nations, including China and South Korea, have taken the opposite stance and outright banned ICOs.
Many European countries, Canada, and the United States are still working on regulations that are best suited for ICO activities and align with their respective country' existing policies. Various countries have also made cautionary statements regarding the hazards of participating in possibly fraudulent initial coin offerings.
In 2017, the United States issued a statement through the Securities and Exchange Commission (SEC) stating that any asset sold to US investors must comply with securities laws or risk legal action. Following its $1.7 billion ICO sale, the commission filed an emergency action against Telegram for illegal activities. The investigation culminated in a preliminary injunction issued by a court requiring the return of $1.2 billion to investors and the payment of a $18.5 million civil penalty.
PRO TIP: You can easily find useful information on upcoming, ongoing, and concluded ICOs on ICO Calendars. They are available on reputable platforms such as CoinMarketCap and Cointelegraph.
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