What is an ICO?
The abbreviation ICO stands for Initial Coin Offering, i.e. the initial placement of coins (tokens). During the ICO, the project team sells digital tokens for cryptocurrencies or fiat money among investors. Later, these coins can be used on the project platform as an internal currency or traded on exchanges. The term crowdsale is also often used instead of ICOs.
Why do projects conduct ICOs?
By issuing their own tokens and exchanging them for popular cryptocurrencies (for example, Bitcoin or Ethereum) or for fiat currencies (dollars or euros), the project attracts the funding necessary for launching or development. As a rule, ICOs are carried out in the early stages of the existence of projects, before creation their full infrastructure. The funds raised go to finance the final stage of development, marketing, or are sent to special development funds to support projects in the long term.
What is the legal status of an ICO?
Now ICO can not be called both legal and illegal way to attract investment. Its legal status, procedure and requirements for companies that are going to raise funds in this way are not currently defined in any country in the world. In addition, it is difficult to determine the legal nature of relations arising during the ICO. Since financial relations in their classical sense are difficult to call such relations. At the same time, we can confidently say that the basis of this process is the reputation of the people behind the cryptocurrency startup, and the trust of users (potential investors).
Can I compare ICOs with IPOs?
When a company wants to offer its shares to the general public, it conducts an IPO (Initial Public Offering – Initial Public Offering on the stock exchange). ICO can work on a similar principle: investors, investing, receive a “share” in the company in the form of cryptographic tokens. At the same time, ICO has common features with crowdfunding: funds are usually collected to implement a certain idea, that is, at the stage when the project does not have a finished product.
At the same time, IPOs are regulated by national law. For example, in the United States, for a public offering of shares, a company must be incorporated as a joint stock company, and also registered with the SEC (Securities and Exchange Commission). All this makes the process of attracting investment in the project at an early stage of its development more complicated, however, it provides certain guarantees to investors.
In the case of ICOs, the process of attracting investments is much easier, but users are not insured.
What attracts investors to the ICO?
When purchasing tokens offered at ICOs, investors first of all calculate:
Benefit from selling them at a higher price in the future (a classic example is Ethereum, whose tokens during the ICO in the summer of 2014 cost less than one cent, and today their price has risen to almost $ 400);
Use the tokens for their intended purpose, having received the claimed services at a lower price.
What are the risks of participating in an ICO?
Perhaps the biggest risk can be called ordinary fraud, when the creators of the project pursue only one goal: to collect user money. In addition, since there are no laws that would govern the implementation of cryptocurrency crowdsales, from the perspective of an investor this transaction is always based on trust . It cannot be ruled out that the project may not live up to the stage of product appearance or disappoint the investor with its implementation.
In addition, in their current form, ICOs are usually held in one round, and they have little chance of getting additional financing. It can also be considered as a potential risk in terms of the long-term existence of the project.
What should I look for before participating in an ICO?
The abundance of various ICOs can confuse many inexperienced investors. Therefore, first of all, you need to carefully study the Token Sale Agreement. When reading this document, curious details may have surfaced that the ICO organizers may not have publicly announced. In addition, there are unofficial indicators of the project’s good faith:
- The presence of all the necessary agreements and rules published on the website as a public offer.
- Ready working prototype.
- Well-written whitepaper and the rest of the documentation.
- Existence of escrow (special conditional account on which property, documents or funds are recorded until the onset of certain circumstances or the fulfillment of certain obligations).
- Incorporation (registration) of the company itself.
- The untarnished reputation of the people behind the project.
You can read more about the legal aspects of ICOs here.
What were some of the most successful ICOs?
The success of the ICO is a rather arbitrary thing. However generally accepted
The second indicator is the amount of funds raised. In this regard, the leadership at the moment (we are talking about dry statistics, discarding other possibly controversial aspects of the campaigns) belongs to the Bancor project, which in June 2017 gathered 396,720 ETH in less than three hours. An example of another rapid crowdsale was the innovative campaign Brave browser: in about 30 seconds, the project managed to achieve a financial goal and raise $ 35 million.
In May 2017, the list of successful cryptocurrency crowdsales was supplemented by the Storj projects ($ 30 million in less than a week) and Aragon – in just 15 minutes from the start of the ICO, the project collected the planned 275,000 ETH (about $ 25 million).
You can also recall the projects mobileGo ($ 53 million), Gnosis ($ 12.5 million in 10 minutes), Blockchain Capital ($ 10 million in two hours), Aeternity (23.4 CHF) and, finally, the Ethereum network project that crashed Status (about $ 100 million).
Also, do not forget about the The DAO project, which has already become part of the history of the cryptocurrency world, as a result of the collapse of which in the summer of 2016 Ethereum Classic appeared.