The term ICO has gained popularity in the cryptocurrency arena. It’s a process of raising capital for a particular project or idea, the only difference is instead of getting shares, the investor receives tokens, which could be Bitcoin, Ethereum, Ripple, Dash and so on. The exchange of fiat currency for electronic tokens in the form of cryptocurrency confirms the investor’s stake in the company or project. However, these tokens only hold value within the scope of a corresponding project, for example: Investor exchanges money for Z tokens in Project Z, and another investor exchanges money for Y tokens in Project Y.
An Initial Coin Offering is becoming a really attractive route for raising capital, because it allows people to bypass the “standard” way for raising capital, by a means of approaching venture capitalists or angel investors.
Typically, the process of steering towards venture capitalists and angel investors doesn’t always have the desired outcome for the project owner. They are either turned down because the investor doesn’t like the project or isn’t interested. Or the investor may be greedy and ask for too much up front from the project owner, causing negotiations to breakdown before they’ve even begun. You should definitely be weary of bitcoin scams.
The process of an ICO is a lot more appealing because the project owner can use a platform like BlockStarter to create a plan outlining the future plans and developments for the project (this is called whitepaper). Potential investors, like you or I can interpret the whitepaper and determine whether it’s something worth while investing in.
But hang on just second!
Does all of this seem a bit too good to be true here, as the old saying goes. Well, in a way yes. People seem to read too much into the attractiveness of an Initial Coin Offering. One major imperfection with this method of raising capital involves the process of redistributing the profits (if there is any, and I’ll explain why in a moment) afterwards.
Because there isn’t a method for dividend distribution. More often than not, project owners only seem to plan up to the money making stage of the ICO lifecycle and neglect the early investors in the projects infancy. The following scenario can often mislead naive and innocent people into investing in something that hasn’t even reached the developmental stage, it’s merely words that have been out together to form a plan of something that’s only theory.
Not to mention, these offerings can something raise more money than initially required to get the project up and running, and if the project fails, not to worry the owners can retire to the bahamas and live off your kind donations. (This obviously isn’t always the case).
There are plenty of legitimate projects out in the open who have raised an insane amount of capital, and in such a short space of time too.
A disintermediation platform known as Aragon (an Ethereum based platform), which focuses on providing companies with a path to autonomy, utilising blockchain technology – eliminating the need for intermediaries which can be rather costly. Things such as fundraising, payroll and accounting can all be managed through Aragon’s interface.
Aragon managed to raise $25,000,000 in Ether in an amazing 15 minutes! This sizeable investment came from a pool of around 2000 people in exchange for Ant tokens. Also making it the 4th biggest crowdsale project ever. Forbes had this to say.
The legalities of it all
Are ICO’s even legal? Well maybe, it’s a bit of a rough patch when it comes to the legalities on an ICO because there can be cases for and against why it’s legal and why it’s not. It all stems from the fact that it’s a new approach to investing that hasn’t been regulated yet.
However, courtesy of the SEC (Securities Exchange Commission) have somewhat managed to shine a light on some of the grey areas surrounding the legal stand point of an ICO.
In some cases, the token an investor receives in exchange for monetary funds can just be that. A token. If this is the case, it means that it gives the owner access to a specific protocol, or network. This results in it not being a financial security. BUT! If the token happens to an equity token, which means that it’s sole purpose is for its value to rise, then it takes on the form a financial security object.
ICO vs IPO – What’s the difference
A lot of you might be reading this and come to the conclusion that this sounds like a rehash of an IPO, and well you’re half right. The place where they both differ is from a regulation stand-point.
You see, when a company decides to launch an IPO (Initial Public Offering) it is bound by the SEC to follow strict rules in accordance to the law. Imagine if you would have invested in the bitcoin early on.
They have to:
- Form a board of directors.
- Report auditable financial & accounting information every quarter.
- Have a solid management team
These are just a fraction of the many hoops that a company has to jump through in order to get the clearance in needs to launch its IPO.
Whilst the attractiveness of an ICO seems to open up doors in people’s minds to riches and other treasure, first do your research on WHO is launching the ICO and at what stage the project is currently in. If they don’t have a prototype or at least an early stage version of a product then maybe it’s not the best time to be parting with anything just yet.