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What is an Initial coin Offering (ICO) and How does it work?

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Initial coin offerings (ICO) seem to be the new replacement for Venture capitalists. ICOs are a great way for project startups to get funding if they do not want to go through the VC funding route. ICOs unlike IPOs do not require much paperwork to get funding from potential investors, the financial and legal hassle is nonexistent.

With just a white paper, a team, a functioning website, and active social media, projects can get millions of dollars in funding from investors. But what exactly are ICOs all about?


What is an Initial Coin Offerings (ICO)?

An Initial coin offering is a way by which new companies and startups, gather funding that aids the future development of that project. In an ICO, the team of the startup generates blockchain-based tokens or coins that they give to investors in return for their money. When early Investors or supporters receive these tokens, they believe it will increase in value over time and the money they invested will be used to further develop the project.

ICOs were first recorded in 2014 with Ethereum being one of the first pioneers of ICOs. Ethereum had one of the largest early fundings of that year after selling 50 million ETHER and raising roughly 18 million dollars at the time.

ICOs became popular during the 2017 ICO boom where hundreds of unregulated projects got funded with millions of dollars. A huge number of projects that got funded during the 2017 ICO boom are nowhere to be found today.

Difference between ICOs and IPOs


Many people find it hard to distinguish ICOs from IPOs. the major difference between an ICO and an IPO is the regulations that surround them.
IPOs happen when already established businesses are willing to sell shares of the business to investors as a way to raise funds. Before a business conducts an IPO, it has to be registered with a regulatory authority.

The registered business has to reveal its prospectus, which clearly states the intentions and future plans of the business after fundraising is completed. This has to be checked by a legal and financial authority and if the required standards for issuance aren’t met, the IPO is not approved. Financial authorities usually crack down on companies that issue unauthorized public offerings.

A company Issuing an ICO doesn’t have to be registered by a legal body. ICOs are not as regulated as IPOs, they are regulated only if the offerings are sold as securities and not utility tokens. An anonymous team can conduct an ICO with just an official whitepaper, website, and active social media handles. But In the business world, A whitepaper isn’t enough to make Investors buy shares of a company.


Difference between ICOs and IEOs

An IEO stands for Initial Exchange offering. IEOs are similar to ICOs but they are conducted by a team with an exchange. When a reputable exchange does an IEO with a project, the investors give the level of trust to the project the same level of trust they give to the exchange. 

That exchange wouldn’t want to have a reputation of listing ‘scam projects’ so the exchange will run its background check before partnering with that project. Both parties stand to gain from an IEO. The project gains exposure and trust as a result of using that exchange to launch its IEO. depending on the terms of the agreement, the Exchange might have a share of sold tokens. And will benefit if the project performs well in the long run.

How do ICOs work?

Before conducting a crowd sale, a project founder must have already done some work by setting up his team which consists of marketers, developers, managers, technical advisors, legal advisors, and Engineers. the official website should be up and running, legal operations are in check and the community and marketing strategy should be in order.

The whitepaper is also written. A white paper is very crucial as the white paper is the official document investors look at before making investing decisions.

ICOs launch in various forms. A Project might launch using its own native blockchain as Ethereum did in 2014 or launch on top of an already existing blockchain as polygon did. Recently, the majority of projects launch using the ERC-20 token standard which is a smart contract compatible chain on the Ethereum blockchain.

This method of launch is popular because it takes a lot of time and effort to build a native blockchain from scratch, But it takes little effort to build on top of an already existing blockchain. Thereby exposing developers and engineers to tools that have already been tested.

The date of the ICO is announced before time and the number of tokens that will be sold is revealed. Sites like Icodrops show upcoming and ended ICOs. ICOs come with a target amount that the team wants to realize. A specific wallet Address where funds are to be sent is made available to investors. These funds can be in popular cryptocurrencies like bitcoin and Ethereum. Some ICOs take days to complete while others sell out in minutes.

Regulations around ICOs

As a result of many failed projects during the ICO boom, strict regulations regarding ICOs have been put in place in some countries. ICOs were declared securities in the US and people who offer these securities unauthorized to US citizens will be prosecuted.

Each country has its own jurisdictions of what securities are so these laws vary from country to country. Regulators from Countries like UK and Australia have warned retail investors about the potential risks of public offerings.

A notable instance of a company being cracked down by the SEC securities exchange commission occurred in December of 2017 when they stopped the ICO by ‘Munchee’ a company in California with a food review app. This company wanted to create a cryptocurrency that would be used to order food from the app.

Risks surrounding ICOs

ICOs face potential risks to investors and projects. If the legal requirements are not met, the project could see a lot of negative impacts if cracked down by the sec. A good example is the ripple case which has been ongoing for a while now.

ICOs even those that are not tagged securities do not have a guaranteed return of investment. ROI. It is important to perform extensive research before taking part in an ICO as many ICOs do not succeed after launch. Some questions you should ask are;

Who are the team and are they trustworthy

Why does the project need a token and is it necessary

What problem does the project solve?

How many percent of the token is held by the team and how many are being sold?

Has the smart contract code been audited by a reputable firm?

Answering these questions logically and not with emotions should give you some clarity before investing in these startups.

Closing thoughts.

ICOs are considered to be risky investments. They are under-regulated and under-scrutinized. as blockchain technology is moving at a much faster pace than the legal industry, it is important that you weigh the risks and rewards when participating in ICOs and also ensure that you do not invest more than you can afford to lose.

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