Initial coin offering – There are several ways of raising the capital necessary for expanding and developing traditional companies. A company may start small growing in accordance to its profits.
Waiting for funds to shape up while staying obliged to company owners only. As an alternative, a company can reach out to early outside investors for initial support. In return, you provide them with a rapid influx of money as a trade-off for giving off part of ownership stake.
Another method involves companies going public. In this case, a company earns funds from different investors by selling their shares via an initial public offering.
What is an initial coin offering?
An initial coin offering is a cryptocurrency version of an IPO in the ideal investment world. Initial Coin Offerings are like fundraisers of some sort – any organization that wants to develop a new app, coin or service must launch an ICO.
After that investors who are interested will buy into this offering with either pre-existing digital tokens or fiat currency. As a reward for their support, these investors receive a new cryptocurrency token precise to the ICO. Investors wait with the expectation that the token will perform remarkably well in the future so that they can receive a stellar ROI ( return on investment).
These funds provided by the investors are used by the company to reach their goals, launching its products or developing its digital currency. ICOs are what startups use to avoid the problematic and regulated process of raising capital which is recommended by banks or venture capitalists.
What is the difference between other types of investments?
Initial coin offerings, crowdfunding, and IPOs are usually compared to each other. However, though they may have similar characteristics, they are all different. They also come with innovations to the investment world that were not possible before. ICOs are similar to IPOs (Initial Public Offerings) in that they sell a stake to raise money. And they give investors a potential profit, give and take the risk and potential failures on delivering the promise.
Nevertheless, ICOs also differ from IPOs which are more similar to crowdfunding campaigns. The similarity is that they get support from early fanatics who enjoy investing in products or services that are yet to launch. Now the difference is that crowdfunding is like a donation, CLICK HERE for more information. Whereas with ICOs participants own a financial stake with hopes to get a healthy ROI for their input.
For any new technology that involves large sums of money, there is always scrutiny from scams and regulators.
ICOs have experienced both.
ARE ICOs LEGAL?
Legality is dependent on your location in the world. However, we cannot analyze all the countries in the world but let’s go through some of the major markets.
China used to be a rich market for, but now it has gone down hard on the industry. The People’s Bank of China declared last year that ICOs are illegal placing risk warnings everywhere. Soon after that South Korea banned fundraising through virtual currencies.
The United States
In the USA there are no specific regulations for initial coin offerings. However, the coin may be put under the authority of the securities and exchange commission (SEC), depending on how it is ranked. If the SEC considers the coin a security, then the organization that stands for it will need to register with the regulator.
Everywhere else in Europe
The ESMA (European Securities and Markets Authority ) released guidance on ICOs. The regulator insists that ICOs qualified as financial instruments may fall under appropriate laws with regards to investment legislates and or anti-money laundry.
Other countries are trying to formulate new rules to make progress in the regulation of ICOs. For instance in Malta, they only just approved three relatively new bills concerning the blockchain technology and cryptocurrencies. One of those new regulations strives to introduce a regulatory regime to Initial Coin Offerings.
Same applies to the capital of the United Arab Emirates; Abu Dhabi.
The regulator published guidelines on the Initial Coin Offering launch. Within the guidelines companies, that want to implement an ICO must go to the financial services regulatory Authority to check if it is under the body’s regulations. Organizations must also publish a prospectus similar to what a business would do on the stock market for an (IPO). The FSRA needs to approve of any secondary market operators or intermediaries associated with ICOs
TYPES OF ICOs
Because ICOs lack regulation there Is so much freedom on how to run them. With different approaches on how to set up the campaigns. It is very rare for one Initial Coin Offering to happen in the same manner as the next. Therefore it is almost impossible to go through every single scenario. However, during ICOs, token prices go through different stages. Generally here are the four main pricing mechanisms.
With Initial Coin Offerings there are stages in the process whereby the team puts a fixed exchange rate on the tokens. The rate may increase at any time. This allows the early investor who took the most risk, to receive the best cost per coin ratio.
The dutch auction is where ICOs where initially presented by the gnosis team. So the sale begins at the highest cost per token and decreases relatively until the auction is over. For instance, to raise money for their project the Gnosis made use of the dutch auction mechanism.
If the issued token has a fixed exchange rate, investors will have a chance to get as many tokens as they want at that particular price. This specific mechanism is attractive to huge investors as they don’t need to influence prices by buying tokens in bulk. When the token sale is over, there is always a period of cooling off. During this period tokens may be stationary, and investors will not be permitted to transfer their coins. Also, after the cool off period, tokens will be listed on exchanges, and people will be allowed to exchange it at market price.
Price not determined
A developer may choose not to trade his token at a fixed rate. Instead, he may opt for people to invest in his start-up then allocate the new tokens equivalently providing every individual with a percentage proportional to his investment.
Note; before investing in ICOs be sure to know how much tokens are in circulation as well as the pricing mechanism.
Advantages of Initial Coin Offering
One of the benefits of ICOs is that its aid in bootstrapping a blockchain project and get starting capital and a great team and be in business right away. You don’t even have to surrender equity for the funds you raise.
Initial coin offerings eliminate a lot of difficulties in the VC procedure.
Thereby giving startups the opportunity to quickly take a shortcut into the market – by reaching out to potential clients directly with the idea. This process will present a method to device general interest in the project.
Furthermore, because of the open-source factor of blockchain projects as well as Initial Coin Offerings, there is a chance to split and formulate similar projects. These projects will be a bit different and will fulfill a wider range of targeted audiences – allowing an analysis of the market viability of several distinctions of the project.
Disadvantages of Initial Coin Offering
The issue with initial coin offering is that in most case they turn out to be scams- ideas that did not fulfill promises or did not materialize.
Concerns and skepticism are increasingly directed to ICOs because of too many cases of projects that didn’t turn out well or just scams. The landscape is slowly self-regulating by implementing a set of rules and the most suitable practices to evaluate each project. Nowadays many platforms carry out due diligence on ICOs helping investors make informed decisions.
Another disadvantage with Initial Coin Offering is that they are not registered or regulated with any company or government thus offers no protection to investors. They owe this feature to blockchain and bitcoin technologies that support them.