ICO stands for Initial Coin Offering. It is a new method to raise capital for all types of blockchain-related projects by selling cryptocurrency. New projects use ICOs to sell freshly minted crypto tokens in exchange for Bitcoin, Ethereum, and other cryptocurrencies. In a way, it resembles Initial Public Offerings (IPO), except that most of the ICOs are unregulated and grant little to none rights to investors, however, there are several ways how ICOs can be beneficial for the stakeholders.
ICO Benefits
The investors can enjoy the following benefits:
- A chance to get a new cryptocurrency at the lowest price possible in hopes to get great returns on their investment.
- ICO coins may include additional benefits, like revenue redistribution or privileged access to projects products and their services.
- Ability to support the projects and the teams you like.
Meanwhile, token issuers get:
- Quick access to seed funding with some regulatory restrictions.
- Opportunity to create and experiment with decentralized business models.
- An initial community consists of users who are eager to test the service/product.
ICO Risks
ICOs come with some risks too. For example, token buyers might face:
- Relatively inexperienced team with no guarantee that the project will fulfil what they promise.
- Some ICOs has no regulatory protection or guarantee of returns.
- Limited transparency on some progress and development of the project.
- The risk of the project might be a scam or Pump and Dump scheme.
At the same time, ICO initiators take the risk due to:
- Uncertain regulations that may lead to imposing fines or sentences.
- The volatility of the cryptocurrencies market may result in an unstable investment.
- Little to none information about the token or the coin holders.
How does ICO work?
A company or project publishing a so-called whitepaper to hold an ICO. This whitepaper explains the project, its goals, funds it needs to raise when the ICO is scheduled, and other information to help investors make their decision in order to participate.
The investors get the project’s cryptocurrency in exchange for making an investment. It’s usually referred to as a token. Depending on the project, you can buy its tokens with cryptocurrencies like Bitcoin, Ethereum, or fiat currencies like the US dollar and Euro.
Most of the ICO tokens are issued on DApp platforms. As of 2018 and 2019, the most popular token issuance platform is Ethereum.
ICOs let startups and other companies raise capital easily. However, the cryptocurrency market is still largely unregulated, and they don’t need to deal with venture capitalists or banks, and raising capital through an ICO is expected to become more complicated in the future as the market matures and new regulations are introduced.
ICOs and Regulations
There is no clear regulatory framework regarding ICOs yet. In the future, it’s likely to be regulated. Therefore, most ICOs are required to comply with KYC/AML rules. As of now, it’s too difficult to impose any limits, since most regulators are hesitant to put more restrictions on a potentially world-changing technology.
United States Securities and Exchanges Commission (SEC) treats ICO’s in a different way. If a token is sold, then it’s just a utility token, it does not classify as financial security. However, if the token is considered as an equity coin with the purpose of getting rewarded in value and benefit its investors, then it might be treated as a security token and must comply with the legal processes.
Eventually and until a regulatory framework is imposed, most people will continue to use ICOs as a method for fundraising.
How to avoid scam ICOs?
The ability to identify scam ICOs can save you a lot of money, there are ways to identify a scam ICO. Look for these common signals:
- Anonymous team: Many scams do not introduce their team, so no one can verify who is related to the project. It is a major red flag.
- An offer seems too good to be true: If the project offers you huge returns or impossible products, that’s a major red flag as well.
- No roadmap. A serious startup always plans ahead and is open about its further steps. If the future of the project is not obvious, it’s probably non-existent.
- Announcements on big websites: A legit way to launch an ICO is by announcing it on icodrops.com and BitcoinTalk.org, one of the largest websites and crypto forums that legitimate projects will gladly list their ICOs on them.
- Code: Credible projects will commit their code to Github where everyone can review it. If there’s no code, then most probably there’s no project.
- The necessity of using the blockchain technology: Many projects can function well without using the blockchain technology. Many projects try to take advantage of ICOs just to collect extra money. So ask yourself before investing, if this project really needs its own coin or they’re just collecting money.
- PR and media activity: Trustworthy projects hire qualified marketing specialists who manage to create an active, engaged community on social media and other platforms. Also, it is always a good sign if the project gets positive mentions in quality publications like TV, magazines, and popular websites.
Remember that not all ICOs are scams, and they also provide a legit way to raise funds for legit projects, you just have to do your own due diligence before making the decision to invest.
What is an IEO?
IEO stands for Initial Exchange Offering. It is a token sale organized by a cryptocurrency exchange like Binance Launchpad and Kucoin Spotlight. IEOs are available for participation exclusively to the exchange’s users, although some IEOs may take place in several exchanges. Just like ICOs, IEOs allow investors to get their tokens or the new cryptocurrency while raising funds for promising crypto projects.
What is an STO?
STO stands for Security Token Offering. It’s the way of tokenizing tradable financial assets and offers these assets to the public in a regulated process. But unlike an ICO, a security token represents an investment contract into an underlying investment asset, such as stocks and it should adhere to some laws and oversight by regulators.
