ICO is an abbreviation for an initial coin offering. Essentially it is crowdfunding that is driven by a cryptocurrency, which is used to finance a startup company.
The fundraising method was pioneered by Ethereum in 2014, it has successfully powered the growth of ‘Smart Contracts’ and continues to enable groundbreaking technology and innovations to be developed.
It works similarly to a crowdsale, which refers to a method of selling participation in an economy, giving investors access to the features of a particular project starting at a later date.
Unlike an ‘initial public offering‘ which sells a share in the ownership of the company itself, ICOs provide a means by which startups avoid costs of regulatory compliance and intermediaries, such as venture capitalists, bank and stock exchanges.
The typical ICO begins with a white paper detailing the project, their plan, goals, technical information and the financial budget. It is important to understand how their coins or tokens will be distributed, whether they will be a fixed number and any preferential terms.
In an ICO, a pre-allocated number of the crowdfunded cryptocurrency (“token sale”) is reserved for the investors in the form of “tokens”. The aim is that these tokens will become functional units of currency, if or when the ICO’s funding goal is met and the project launches. They can then be exchanged for legal tender or other cryptocurrencies such as Bitcoin or Ethereum.
ICOs have now overtaken venture capital as a means of raising money for blockchain startups. But we cannot ignore the controversy. As a currently unregulated mechanism for raising funds, it has attracted the good, the bad and the ugly. Over the last 6 months we have seen Government authorities going back and forth, trying to understand how to regulate this new phenomenon, the U.S. and the U.K. both issued statements warning investors to beware of scammers using ICOs to execute “pump and dump” schemes, in which the scammer talks up the value of an ICO in order to generate interest and drive up the value of the coins, and then quickly “dumps” the coins for a profit. However, the SEC has acknowledged that ICOs “may provide fair and lawful investment opportunities”. Indeed, advocates of the ICO method believe it has democratised the venture capital process.
We are now seeing more secure offerings being facilitated by exchanges or an escrow service. According to the ICO rating website, ICOdata, there has been over 800 ICOs totaling more than $6 billion in ICO funding to date.
It is clear that this new democratised investing platform is evolving with phenomenal speed. The ICO method is certainly a major force behind the speed of this growth, enabling the development of innovative projects.