ICOs, or initial coin offerings, are under a significant amount of scrutiny around the world at the moment. Financial regulatory bodies in particular are currently deciding on how to regulate what is the financial equivalent of a wild west scenario, with governmental sectors scrambling to keep up with the runaway blockchain technology train.
ICOs are a powerful way for new and disruptive platforms to gather capital, but have generated a significant amount of controversy due to their unregulated natural. One of the best ways to illustrate the issues with ICOs is to compare them to their contemporary equivalent, IPOs.
In this article, we’ll compare ICOs to IPOs and find out how they differ, as well as examine their regulation and best due diligence practices, in order to help you gain a deeper understanding of one of the hottest topics in the blockchain sector.
What Is An ICO?
An ICO, or an initial coin offering, is an offering in which a company sells cryptocurrency tokens to the general public. These offerings are typically made in order to gain startup capital, or to meet a range of other business objectives. For more information, see our article on the fundamentals of initial coin offerings.
In return for their investment, ICO participants generally receive a set number of digital currency tokens, which are commonly used as currency on the prospective platform. In order to launch an ICO, there is a de facto process that must be followed to achieve success,
Most successful ICOs release a white paper, in addition to a breakdown of token cost, total token cap, the budget or distribution of token funds, and a chronological roadmap that the organization will follow over the development process. An effective ICO typically includes a breakdown of the team members of the organization in order to facilitate enhanced transparency.
What Is An IPO?
In contrast to ICOs, IPOs are well-established processes that allow companies to market and sell securities to the public for the first time. Companies frequently launch IPOs, or Initial Public Offerings, but are also able to sell a range of other securities, including warrants, bonds, and capital notes.
In order to launch an IPO, a company will commonly hire a selection of several different investment banks, which are referred to as underwriters. These underwriters work in tandem with the company to develop a clear prediction of how much the planned IPO will raise and determine the kinds of securities that will be sold.
The underwriters will work together to develop a preliminary prospectus, which typically provides a breakdown of information about the company, its business description and business plan, management structure, ownership structure, strategic initiatives, and financial documents.
After a lengthy process of development, refinement, and revision, the preliminary prospectus becomes the final prospectus, which is submitted to a regulatory body called the SEC in order to enable the IPO.
The biggest difference between ICOs and IPOs is their status and treatment under current legislative environments. As IPOs are an established method of raising capital, they are tightly regulated, and must follow strict rules. IPOs must inform the SEC, the regulatory body in charge of IPO management, of any potential risks, as well as all pertinent information regarding the business.
Unlike IPOs, ICOs are not governed by any sort of regulation or legislation. Many market observers have accurately observed that this lack of oversight has the potential to burn investors. Most of the ICOs present in the blockchain environment have provided a significant return, but others have suffered losses, and some have even been downright fraudulent.
As a result of this unregulated environment, the ICO market is extremely volatile. If investors purchase tokens through an ICO and lose money, they have no legal recourse to recover their funds.
Regardless of the type of investment you are considering, preparation and investigation is the most important element of your strategy. It’s important to remain cautious when assessing an ICO- while the prospects of these sales can seem both extremely lucrative and extremely intimidating, there are a number of measures you can undertake to ensure you’ve performed your due diligence.
IPOs typically offer a range of different windows through which investors are able to purchase securities. ICOs, however, have been observed to completely sell out in mere seconds. Blockchain based browser Brave sold out in just 30 seconds, generating more than $35 million USD, while Esports platform FirstBlood raised more than $5.5 million USD in less than a minute.
Buying securities in an IPO, on the other hand, is far more simple and slower-paced, and can be conducted through a broker. Participating in the launch of an ICO requires investors set up a wallet, understand the basics of cryptocurrency, and then transfer cryptocurrency in order to purchase the digital tokens being sold in the ICO.
ICOs vs IPOs Conclusion
While ICOs and IPOs may appear similar on the surface level, they are both extremely different. While IPOs require a lengthy approval process and are governed by a regulatory body, virtually anybody with the wherewithal to create a whitepaper can run an ICO.
As always with any kind of investment, gathering intelligence is key. Always ensure you’re performing the necessary research in order to strategize effectively, whether investing in IPOs or ICOs.