What is An Initial Coin Offering?
21st September, 2018
Initial Coin Offerings can be considered as an alternative form of crowdfunding that has emerged outside of the traditional financial system. This model has helped a lot of successful projects and companies get the funding required to start their business.
ICOs or initial coin offerings have received a lot of press and exposure lately and now everyone wants to know what all the hype is about. If you’re in the same boat, you’ve come to the right place. In this post we’re going to break down and explain ICOs for beginners.
With the advent of blockchain technology, we are now able to make trustless transactions without requiring intermediary parties. The technology itself is a big step towards solving the issue of digital trust. Given this advancement, technology startups are now turning towards blockchain technology in order to raise funds from people around the world. This is an exciting development in crowdsourcing projects and means people can now invest in upcoming startups with few limitations.
Startups that do initial coin offerings basically accept cryptocurrencies in exchange for token sales. These tokens are technically a lot like shares (not legally) and investors buy them in hopes of future profits as the prices of these tokens go up. A startup comes up with an idea for a blockchain related project and proposes it to the community.
ICOs have had its ups and downs through its short life so far, but in the last year has shown tremendous exponential growth and shoes no signs of slowing down. Take a look at this infographic for more on the rise of ICO and what that means for the future of investing. In an ICO, there can be a specific goal or limit for project funding, meaning that every token will have a pre-designated price that will not change during the Initial Coin Offering period, which also means that the token supply is static. It is also possible to have a static supply with a dynamic funding goal, in which the distribution of tokens will be made according to the funds received, meaning that the more funds the project receives the higher the token price will be.
If the startup finds traction, they go ahead and formally draft a white paper that provides all the details — from the team working behind the project to its technical aspects and future plans. Other particulars are decided then, including the number of tokens that will be distributed, the price of each token and how the tokens will be used in the project’s ecosystem.
Marketing campaigns are launched after this to gain momentum and an ICO date is unveiled when the token sale is scheduled to begin. There is usually a defined time period to raise the required funds, after which the sale closes. Investors then start receiving their tokens and plans are made for them to go live on exchanges for trading.
The legal state of ICO is mostly undefined. Ideally, the token is sold not as a financial asset but as a digital good like many other things. This is why ICO is often called “crowd sale”. In this case, in the most jurisdiction, the funding with an ICO is not regulated, which makes it extremely easy and paperless, given a lawyer experienced with the issue is on board.
However, some jurisdictions seem to be aware of ICO and tend to regulate them similar to the sale of shares and securities. The spectacular implosion of the DAO did a good job in kindle regulators attention. So while ICO currently mostly happen in a gray area, in the future they most likely will be regulated. This could bear some financial and legal risks for investors. Also, the cost and effort to comply with regulation could reduce the advantages of ICO compared with traditional means of funding.