Initial Coin Offering (ICO)

What Is an initial Coin Offering ( ICO ) ?

An initial coin volunteer ( ICO ) is the cryptocurrency industry ‘s equivalent to an initial public offer ( IPO ). A ship’s company seeking to raise money to create a new coin, app, or service can launch an ICO as a manner to raise funds .

matter to investors can buy into an initial coin offer to receive a raw cryptocurrency token issued by the party. This token may have some utility related to the product or service that the company is offering, or it may just represent a venture in the company or project.

Key Takeaways

  • Initial coin offerings are a popular way to raise funds for products and services usually related to cryptocurrency.
  • ICOs are similar to initial public offerings, but coins issued in an ICO can also have utility for a software service or product.
  • Some ICOs have yielded massive returns for investors. Numerous others have turned out to be fraudulent or have performed extremely poorly.
  • To participate in an ICO, you usually need to first purchase a more established digital currency, plus have a basic understanding of cryptocurrency wallets and exchanges.
  • ICOs are, for the most part, completely unregulated, so investors must exercise a high degree of caution and diligence when researching and investing in ICOs.

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How an initial Coin Offering ( ICO ) Works

When a cryptocurrency project wants to raise money through ICO, the project organizers ‘ beginning step is to determine how they will structure it. ICOs can be structured in a few different ways, including :

  • Static supply and static price: A company can set a specific funding goal or limit, which means that each token sold in the ICO has a preset price, and the total token supply is fixed.
  • Static supply and dynamic price: An ICO can have a static supply of tokens and a dynamic funding goal—this means that the amount of funds received in the ICO determines the overall price per token.
  • Dynamic supply and static price: Some ICOs have a dynamic token supply but a static price, meaning that the amount of funding received determines the supply.

These three different types of ICOs are illustrated below :

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image by Sabrina Jiang © Investopedia 2020
aboard structuring the ICO, the crypto project normally creates a flannel paper, which it makes available to likely investors via a newfangled web site dedicated to the token. The promoters of the stick out use their white paper to explain authoritative information related to the ICO :

  • What the project is about
  • The need that the project would fulfill upon completion
  • How much money the project needs
  • How many of the virtual tokens the founders will keep
  • What type of payment (which currencies) will be accepted
  • How long the ICO campaign will run

The plan releases the white composition as function of its ICO campaign, which it designs to encourage enthusiasts and supporters of the project buy some of the project ’ sulfur tokens. Investors can generally use decree or digital currentness to buy the new tokens, and it ‘s increasingly common for investors to pay using other forms of crypto such as Bitcoin or Ethereum. These newly issued tokens are exchangeable to shares of stock sold to investors during an IPO .

If the money raised in an ICO is less than the minimum sum required by the ICO ‘s criteria, then all of the money may be returned to the project ‘s investors. The ICO would then be deemed abortive. If the financing requirements are met within the specify meter period, then the money raised is spent in avocation of the plan ‘s goals .

Who Can Launch an ICO ?

Anyone can launch an ICO. With very little rule of ICOs in the U.S. presently, anyone who can access the proper technical school is free to launch a modern cryptocurrency .

But this miss of regulation besides means that person might do whatever it takes to make you believe they have a legitimate ICO—and then abscond with the money. Of all the possible avenues of fund, an ICO is probably one of the easiest to set up as a victimize .

If you ‘re in truth set on buying into a new ICO that you heard about, make sure to do your homework. The first thing is to make sure the people putting up the ICO are real and accountable. One key thing to look for is the merchandise ‘s leads ‘ history with crypto or blockchain. If it seems the plan does n’t involve anyone with relevant, easily verified feel, that ‘s a loss flag .

celebrated actors and entertainers like Steven Seagal besides sometimes encourage their followers to invest in a hot raw ICO. Boxing ace Floyd Mayweather Jr. and music mogul DJ Khaled once promoted Centra Tech, an ICO that raised $ 30 million at the end of 2017. Centra Tech was ultimately deemed a scam in court, resulting in the two celebrities settling charges with U.S. regulators, plus three Centra Tech founders pleading guilty to ICO fraud .

even if anyone can establish and launch an ICO, that does n’t mean that everyone should. If you are thinking about organizing an initial coin offer, ask yourself if your business would well benefit from an ICO.

special Considerations

ICO activeness began to decrease dramatically in 2019, in separate because of the legal gray area that ICOs dwell. Investors can research and find ICOs in which to participate, but there is no surefire way to stay abreast of all the latest initial coin offerings. You can use websites like TopICOlist.com and websites that compare different ICOs against one another .

ICOs can generate a solid amount of hype, and there are numerous sites online where investors gather to discuss new opportunities. Investors seeking to participate in ICOs should first gear familiarize themselves broadly with the cryptocurrency quad and become educated about any ICO before participating. Because ICOs are scantily regulated, prospective investors should exercise extreme caution when investing.

The Securities and Exchange Commission ( SEC ) can intervene in an ICO if necessary. After the creator of Telegram raised $ 1.7 billion in an ICO in 2018 and 2019, the SEC filed an emergency action and obtained a impermanent restrain orderliness, alleging illegal activity on the part of the development team. In March 2020, the U.S. District Court for the Southern District of New York issued a preliminary injunction, and Telegram was ordered to return $ 1.2 billion to investors and pay a civil penalty of $ 18.5 million. There is no guarantee that an investor wo n’t be on the suffer end of a scam when investing in an ICO. To help avoid ICO scams, you can :

  1. Make sure that project developers can clearly define what their goals are. Successful ICOs typically have straightforward, understandable white papers with clear, concise goals.
  2. Look for transparency. Investors should expect 100% transparency from a company launching an ICO.
  3. Review the ICO’s legal terms and conditions. Because traditional regulators generally do not oversee this space, it is an investor’s responsibility to ensure that an ICO is legitimate.
  4. Check that ICO funds are stored in an escrow wallet. This type of wallet requires multiple access keys, which provides useful protection against scams.

Another far consideration is that you typically need to own another cryptocurrency to invest in an ICO. Because new tokens issued in an ICO can much lone be purchased using an established cryptocurrency such as Bitcoin, ICO investors need to already have two cryptocurrency wallets :

  • One crypto wallet to store another cryptocurrency such as Bitcoin or Ethereum
  • An additional cryptocurrency wallet to hold the token or currency being sold for the ICO

initial Coin Offering ( ICO ) volt. initial public Offering ( IPO )

initial public offerings of stock lift money for companies that are becoming populace and consequence in the distribution of shares of the company ‘s stock to investors. For ICOs, crypto companies raise funds through the sales of coins or tokens. In both cases, investors are bullish, whether about the ship’s company or the cryptocurrency, and invest based on some impression that the asset ‘s prize will increase over time .

The primary dispute between an ICO and an initial public offer of stock is that investing in an ICO does n’t secure you an possession stake in the crypto plan or company. ICO participants are gambling that a presently worthless currentness will later increase in respect above its original leverage price .

IPOs are highly regulated by politics organizations such as the Securities and Exchange Commission, while ICOs are largely unregulated. This miss of regulation coupled with the much decentralized nature of crypto projects means that an ICO ‘s structure can vary significantly. By contrast, the structure of most IPOs is largely like .

Though IPOs are funded by generally more button-down investors anticipating a fiscal reelect, ICOs may receive fund from risk-tolerant supporters who are keen to invest in a new, excite visualize. An ICO differs from a crowdfunding event because it offers the hypothesis of fiscal profit over time, whereas crowdfunding initiatives basically precisely get donations. ICOs are besides referred to as “ crowdsales ” because of the possibility of fiscal profit.

Advantages and Disadvantages of Initial Coin Offerings

Online services can facilitate the genesis of cryptocurrency tokens, making it exceptionally easy for a company to consider launching an ICO. ICO managers generate tokens according to the terms of the ICO, receive them, and then distribute the tokens by transferring the coins to individual investors. But because ICOs are not regulated by fiscal authorities like the SEC, funds that are lost due to imposter or incompetence may never be recovered .

early investors in an ICO are normally motivated by the arithmetic mean that the tokens will gain value after the cryptocurrency launches. This is the primary benefit of an ICO : the electric potential for very high returns .

But the legality of cryptocurrency or digital assets is not guaranteed to persist. In 2017, the People ‘s Bank of China formally banned ICOs, slamming them as counterproductive to economic and fiscal stability. The chinese government in 2021 went on to ban cryptocurrency mining and declared all cryptocurrency transactions illegal.

SEC Introduces the HoweyCoin

The SEC in 2018 introduced a bogus coin called the HoweyCoin to demonstrate to person investors the dangers of ICOs. The SEC ‘s HoweyCoin is named after the representation ‘s Howey Test, which is a test to determine whether an investment qualifies as a security. The SEC then used the Howey Test to charge Kik, a messaging overhaul that raised $ 100 million in an unregistered ICO, with illegitimate sales of a security .

The first gear example of the SEC cracking down on an ICO occurred on Dec. 11, 2017, when the representation halted an ICO by Munchee, a California company with a food review app. Munchee was attempting to raise money to create a cryptocurrency that would work within the app to order food. The SEC issued a cease-and-desist letter, treating the ICO as an offer of unregistered securities .

Examples of Initial Coin Offerings

Ethereum ‘s ICO in 2014 is an early, big example of an initial coin propose. The Ethereum ICO raised $ 18 million over a period of 42 days. In 2015, a two-phase ICO began for a party called Antshares, which by and by rebranded as Neo. The first phase of this ICO ended in October 2015, and the second continued until September 2016. During this time, Neo generated about $ 4.5 million .

In another exercise, during a one-month ICO ending in March of 2018, Dragon Coin raised about $ 320 million. besides in 2018, the company behind the EOS chopine shattered Dragon Coin ‘s record by raising a whopping $ 4 billion during a yearlong ICO .

sometimes ICOs with remarkable returns on investment are not the projects that raise the most money, and frailty versa. The amounts raised by ICOs reached a bill in 2017 and 2018 and have declined in recent years. When evaluating the achiever of an ICO, you can consider both the total of money raised in the ICO and the return generated on investment .

Investing in cryptocurrencies and other Initial Coin Offerings ( “ ICOs ” ) is highly bad and bad, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Because each individual ‘s situation is alone, a restricted professional should always be consulted before making any fiscal decisions. Investopedia makes no representations or warranties as to the accuracy or opportuneness of the information contained herein .

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