Engaging in an initial public offering is an often thrown around prospect in the financial markets, but unlike the IPO, Initial Coin Offerings are relatively new phenomena, which came about with the evolution of cryptocurrencies. Just as IPO fever ran high in the 1990s, there is now a flurry of activity on the ICO front.
Cryptocurrencies are forms of digital money designed to be secure and anonymous in most cases, which use a technology called cryptography.
About 900 cryptocurrencies are currently in active use.
ICO: Funding Route For Cryptocurrency Start Ups
The ICO is a way to fund cryptocurrency projects. It is an offering in which a new cryptocurrency project sells part of cryptocurrency tokens to investors in exchange for money, with the proceeds primarily raised in bitcoin or other cryptocurrencies, according to Smith & Crown.
An ICO is a sort of crowdfunding activity that takes place over a period of a week or more, with the participants in the offering allowed to buy newly issued tokens in exchange for cryptocurrencies.
The ICO is done primarily:
- To fund expenses of companies/startups until the project is launched.
- Raise the foundation that provides ongoing support to the project.
- To distribute cryptocurrency tokens, especially to those with a proof of stake consensus algorithm.
Proof of stake is an algorithm to validate transactions and achieve consensus. The creator of a new block is chosen in a deterministic way, depending on its wealth or stake. There is no block reward, with the miners taking only the transaction of fees.
ICO Explained Step By Step
In an ICO there are three scenarios:
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Crudely, these are the steps one follows in an ICO:
- Once someone opts for an ICO, preparatory work is undertaken. Technical milestone for the project for which the ICO is undertaken is set. The plan to do a token sale is unveiled, also giving details of the terms, the project per se and its goals.
- A white paper is published along with the disclosure, selling the merits of the project to potential investors.
- Discussion threads are developed on various social media platforms, expanding upon and debating the merits of the product.
- On the date earmarked for the offering, a tool is available on the ICO landing page, which facilitates interested people to purchase tokens in exchange for a cryptocurrency.
- The tokens are received in the investors' wallets. After receiving the money, the sale is said to be concluded.
- Pricing is set tentatively by an issuer to start with. Once the sale progressive, the pricing may vary depending on what the market is willing to pay or can be set through a Dutch auction.
Companies offering the ICO come from different countries.
Once an investor invests in an ICO and is in possession of tokens, how can he/she liquidate it? An investor who has accumulated tokens over time can sell it when he deems it fit and profitable to someone who needs a product/service associated with cryptocurrencies.
Just like stocks, these tokens are also traded on cryptocurrency exchanges, where tokens can be bought and sold.
Though there is no formal lock-up period for tokens received through an ICO, recently some companies are enforcing a lock-up period, which suggests that the ICO market is slowly and steadily moving toward maturation.
ICO Vs. IPO: Differences And Similarities
While an IPO requires a comprehensive prospectus and needs to be registered with the SEC, FINRA as well the states in which the offering of securities is done, an ICO needs only a technical white paper.
With the cumbersome process involved, the IPO process takes up to six months, when the company's activities are restricted and it has to work with the SEC to ensure compliance in all respects.
However, ICOs, which now remain outside of the regulatory oversight, often provide very limited information concerning the legitimacy of the project. So, the onus of due diligence lies with the investors, impacting their ability to make informed decisions.
SEC Seeks To Regulate ICOs The Same Way As IPOs
Regulators across the globe are contemplating bringing cryptocurrencies and ICOs under regulatory purview. Legal experts are mulling over whether tokens would qualify as a security, drawing points from the Howey Test created by the Supreme Court for determining whether a transaction qualifies as an investment contract.
If this is established, then tokens would be considered as securities and would have to comply with disclosure and regulatory requirements.
Recently the SEC ruled that the ICOs should meet the same regulatory safeguards as traditional securities.
Pointing to DAO's ICO, the SEC said investors purchased tokens and in the process invested in a company, expecting a reasonable return. However, while offering securities to the public, the company violated several securities laws. What prompted the SEC to jump into the fray was that hackers stole tokens offered through the ICO, resulting in a legal fallout.
These Firms Look The ICO Way
Here's the list of some currently active ICOs:
- Obsidian: The Obsidian Platform coalesces blockchain and private anonymous messaging and consists of the Obsidian Coin and the Obsidian Secure Messenger.
- Dimcoin: P2P cryptoexchange built on NEM.
- Latoken: Tokenizing fractions of assets such as real estate and art.
- GX Coin: Wealth management solutions.
- Fluence: It allows to store, query, manage and monetize encrypted structured data, securing it with the power of blockchain technologies.
- Betking: Platform for fair casino game.
Some Upcoming ICOs
- Snapup (Monday): A platform for shop for premium products.
- Chronologic (Monday): A crypto pegged to time on the Ethereum blockchain.
- Ahoolee (Monday): Search engine for products.
- Airtoken (Tuesday): Unlocking mobile accessibility for the underserved.
- Real (Thursday): Offering Real tokens to invest in real estate.
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