An initial coin offering (ICO) is the cryptocurrency equivalent to an initial public offering (IPO). Companies use ICOs whenever they need to raise money for a new coin, app, or service.
Understanding an initial coin offering
Initial coin offerings are a blockchain-based funding process, enabling investors to purchase coins or tokens related to a specific product or project using cryptocurrency.
Coins and tokens are usually linked to the specific business model of the company running the ICO. This gives investors the right to use the company’s product or participate in a project at some predetermined future time.
In general terms, an ICO can be summarized as an IPO that instead uses cryptocurrencies. But there are a couple of key differences. While most IPOs use intermediaries in the capital-raising process, ICOs allow investors direct access to the company they are investing in. Importantly, the interests and values of both parties are more often than not aligned.
Types of initial coin offerings
There are two main types of ICO:
- Private ICOs – where only a small number of investors participate. Many companies choose to set a minimum investment amount which means that only high net-worth individuals and financial institutions can invest.
- Public ICOs – a more accessible form of capital raising akin to crowdfunding. Public ICOs are a democratized form of investing since almost anyone can participate.
How can a business undertake an ICO?
Undertaking an ICO is a complex process requiring an adequate understanding of technology, finance, and relevant legislation. The concept of ICOs is still relatively new in many parts of the world, and regulations are constantly changing.
A general step-by-step process is described below:
- Clarify investment targets – who are the investment targets? To increase the odds of success, the business should have a sound understanding of the type of investor they are targeting.
- Create tokens – as noted earlier, tokens represent assets or utilities in the blockchain. Tokens are fungible and tradeable and should not be confused with pre-existing cryptocurrencies. That is, tokens do not give the investor equity in the company performing an ICO. To that end, Blockchain networks using cryptocurrencies such as Bitcoin can be easily modified to create new tokens.
- Run a promotional campaign – with the information gathered from the first step, the company must run a promotional campaign to attract investors. Most choose to run campaigns online, although in recent times Facebook and Google have taken steps to ban ICO campaigns.
- Initial offering – tokens are then offered to investors who are interested in the ICO across several rounds. Capital is then used to launch the product or service. An investor may choose to utilize the product or service or simply wait for the tokens to appreciate.
- An initial coin offering is the cryptocurrency equivalent to an initial public offering. Companies use a blockchain-based funding process to raise money for a new coin, app, or service.
- There are two main types of initial coin offerings. Participation in a private ICO is generally restricted to financial institutions and the rich. Public ICOs can be thought of as a more accessible, democratized form of crowdfunding.
- Launching an ICO requires knowledge of country-specific regulations and legality. Businesses must also understand the type of investor they are endeavoring to attract.
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