With a total market cap of over $100 billion, the cryptocurrency has attracted the attention of many and the Initial Coin Offerings till June 2017 had already crossed a billion dollars and we can only imagine the amount of growth ever since.
An Initial Coin Offering or ICO is a way of crowdfunding that is propelled by the sale of a digital coin or token to fund the project development. To understand and note the difference, let us compare an ICO with IPO which is very similar in the financial market. IPO stands for Initial Public Offering and refers to the sale of shares of a company for the very first time, this is done to collect funds that can propel the business expansion and development.
There are few differences in the ICO and IPO that make the IPO’s a lot more safe and reliable for investment. However, over the past few months, we’ve seen immense growth on a few ICO’s that make them a viable investment.
AS a part of the requirement to register with the regulatory authority, a legal document called as a prospectus needs to be created by the company that is trying to issue an IPO, the prospectus is a legal declaration of the company’s intention to issue the shares to the public and the document needs to adhere to a certain standard of transparency. The prospectus needs to include key information about the company, its upcoming IPO and other details that could assist prospective investors to make an informed choice.
The ICO’s, on the other hand, are bound by no legal requirements to issue any form of legal documentation and the only document submitted by them is in the form of a white paper which is often made by the developing team that outlines key information of the project and the technology behind it. There is no standard for an ICO whitepaper and any project on the web could make a whitepaper of their own and include any information that is in their favor while excluding relevant chunks that they don’t deem fit.
Before a company is allowed to put up their listings of shares through an IPO, there are a host of requirements that need to be fulfilled including the minimum earnings threshold, a good track record and a few other. The listing process involves a professional accounting firm to verify the accounts and the investment banks to act as an underwriter to the deal while also liaising with exchanges to fulfill the requirements. This process acts as a natural filter for the credible companies to issue their shares in the public and most companies that intend to go public are generally funded by institutional investors that have rigorous checks before.
Since an ICO does not require any adherence to the framework or legal protocol, most of them have no track record and the only thing to back their idea is the white paper of the project. While a few ICO’s have a working prototype, most projects only have a conceptual framework that is explained through the white paper. This reduces the credibility and makes it almost impossible to asses their financial status. ICO’s general makes people focus on the project’s future expectations rather than its history. This furthermore adds to the risk of investing in an ICO. Sometimes you can place your trust in the project by scrutinizing the developers who are a part of it or by looking up the renowned individuals backing the project, but one can never be certain if the investment will ever end up bringing results.
The stocks purchased during an IPO represent the ownership stake on the future earnings of the company, while stocks can be split up into different classes including Common stocks, preferred stocks or hybrid stocks, the utility value of the stock entitles the shareholders in receiving the dividends and also gives them the voting power.
Unlike as in the case of an IPO, the ICO coins do not grant ownership of the project and there are many ways that the investors have a possibility to make a profit in the future. However, this all depends on how the coin in structured and generally a cryptocurrency value depends directly on the perceived utility. Most coins generate the value by confirming a stake in the future revenue of the projects while a few coins equate its value to use within their own ecosystem, this way, the more the coin gets used, the more the ICO investors benefit.
Most IPO issuance can be a lengthy process, this is due to the legal requirement fulfillment and the compliance process. It takes over 4 to 6 months just to get the approval from the regulatory authorities before they can have an IPO.
On the other hand, the entire process of an ICO is much shorter in duration. While nothing is confirmed parse, it mainly depends on the nature and timeline of the project. Post the unveiling of the White paper, the smart contract for the sale is finalized and the crowd sale can begin. The length of the crowd sale can be dependent on multiple factors and needs to close once it reaches the maximum hard cap.
IPO’s are mostly given to institutional investors such as investment banks, mutual funds or endowments and very rarely a small portion is allocated to the normal or retail investors. This essentially means that you need to be a powerful player to get your hands on them and it is extremely hard to acquire shares at an IPO. Most stocks are purchased only once the stocks are traded on exchanges.
On the contrary, anyone can participate in an ICO and the only criteria are to own the base currency which is generally either Bitcoin or Ether, this is then converted to the ICO token. This enables the masses to participate in the fundraising and allows them to make the investments that can potentially earn them multiples over their initial investment.
As we can see, the IPO’s offer much more reliability and their credibility can be easily verified, on the other hand, while the ICO lack those two factors the access and the chances for the potential growth is what lures most people into investing their money.