TL;DR - Definition, explanation, and examples of an Initial Coin Offering (ICO)
Helpfulness - 5
Tags - initial coin offering, ICO, initial capital, financing, creative funding strategies, ICO scams, ICO regulations, blockchain
- What is an ICO?
- How does an ICO work?
- How are entrepreneurs trying to ‘tokenize’ business?
- What are some examples of successful ICOs?
- What are some examples of bad/fraudulent ICOs?
- How are ICOs regulated?
- Many blockchain technology startups are now turning to cryptocurrencies instead of public stock markets or venture capital to raise funds.
- There are over 1,000 digital tokens in existence.
- An Initial Coin Offering (ICO) is a new fundraising tool for startups.
- A startup can create a new cryptocurrency or digital token via different platforms such as Ethereum which has a toolkit allowing companies to create digital coins.
- When the company launches a public ICO, investors can buy its digital tokens with other cryptocurrencies such as bitcoin.
- However, investors do not get any equity stake in the company; instead the digital tokens can be used on the company’s product/service that is to be created and investors can trade the tokens for profits if their value increases.
- Examples of successful ICOs include: Filecoin ($257 million), Tezos ($232 million), EOS ($180 million), SIRIN LABS Token ($157.9 million), and Bancor ($153 million - in about three hours).
- Different countries regulate ICOs in different ways.
- Illegal in China and South Korea
- No specific regulations in the US, but the Securities and exchange Commission (SEC) can intervene; if the SEC deems that a coin is a “security”, then its company may have to register with the SEC.
- Many countries are currently looking into how to regulate ICOs.
- Investing in ICOs is risky because it is putting money into products that do not exist yet.
- These projects have high failure rates; hundreds of coins are already dead; many of them were scams or did not materialise.
- Due to the lack of regulations, scams are rife in the industry and there is very little consumer protection.
- A project called Giza claimed to be developing a super-secure device that would allow people to store cryptocurrencies.
- Scammers managed to raise over $2 million from over 1,000 investors and eventually run off with the funds without delivering any product
- Even successful ICOs sometimes face problems; Bancor suffered a security breach that saw $13.5 million worth of digital tokens stolen.
- There are a lot of problems but also a lot of promise in the ICO space; if ICOs survive, they could pose a challenge to traditional funding methods such as IPOs, VC, or corporate debt.
- The idea of “tokenizing” a product via an ICO could lend itself to traditional assets like stocks, bonds, or even currencies like the U.S. dollar.
Follow up links:
- Blockchain, https://www.cnbc.com/2018/06/18/blockchain-what-is-it-and-how-does-it-work.html
- Crypto token, https://www.investopedia.com/terms/c/crypto-token.asp
- ICO global regulations, https://www.kramerlevin.com/images/content/4/6/v2/46184/181115-presentation-ICO.pdf
- SEC ICO regulations, https://www.skalex.io/ico-law-compliance/