What is it?
Initial Coin Offerings (ICOs) is a form of crowdfunding that uses cryptocurrency tokens to raise capital for a project or business. ICOs are similar to Initial Public Offerings (IPOs) in that they are used to raise funds for a project or business, but instead of offering shares of the company, ICOs offer digital tokens that can be used to purchase goods and services within the project or business. ICOs are typically used to fund the development of new blockchain-based projects, such as decentralized applications (dApps) or distributed ledgers.
Interested investors can buy into an initial coin offering to receive a new cryptocurrency token issued by the company. This token may have some utility related to the product or service that the company is offering or represent a stake in the company or project.
Publication of a White Paper
Along with the ICO structure, the crypto project usually creates a pitchbook (referred to as a white paper in the crypto industry) that it makes available to potential investors via a new website dedicated to the token. The project’s promoters use their white paper to explain important information about the ICO:
What the project entails
The requirement that the project would meet once completed
How much money is required for the project?
How many virtual tokens will the founders keep?
What forms of payment (currencies) will be accepted?
How long will the ICO campaign last?
The white paper is being released as part of the project’s ICO campaign, which is intended to encourage enthusiasts and supporters to purchase some of the project’s tokens. Investors can generally purchase the new tokens using fiat or digital currency, and it’s becoming more common for investors to pay with other forms of cryptocurrency such as Bitcoin or Ethereum. These newly issued tokens are analogous to stock shares sold to investors during an IPO.
What Happens to the Investments?
If an ICO raises less than the minimum amount required by the ICO’s criteria, the funds may be returned to the project’s investors. The ICO would then be deemed a failure. If the funding requirements are met within the time frame specified, the funds raised are spent to achieve the project’s objectives.
Who is Eligible to Launch an ICO?
An ICO can be launched by anyone. With very little regulation of ICOs in the United States at the moment, anyone with access to the necessary technology is free to launch a new cryptocurrency. However, the lack of regulation means that someone may do whatever it takes to convince you that they have a legitimate ICO and then steal your money. An ICO is probably one of the easiest ways to set up a scam among all possible funding avenues.
Investing in an Initial Coin Offering (ICO)
If you’re determined to invest in a new ICO that you’ve heard about, do your research first. The first step is to ensure that the people behind the ICO are genuine and accountable. Next, look into the project leaders’ experience with cryptocurrency and blockchain. If it appears that no one with relevant, easily verifiable experience is involved in the project, this is a red flag.
Even if anyone can create and launch an ICO, it does not follow that everyone should. So, if you’re considering organizing an initial coin offering, consider whether your company would benefit significantly from one.
ICO activity began to decline dramatically in 2019, owing in part to the legal ambiguity that ICOs occupy.
Investors can conduct research and find ICOs in which to participate, but there is no foolproof way to keep up with all of the latest initial coin offerings. You can use websites such as TopICOlist.com and websites that compare different ICOs.
When investing in an ICO, there is no guarantee that the investor will not be the victim of a scam. You can avoid ICO scams by doing the following:
Ascertain that project developers can clearly define their objectives. Successful ICOs typically have clear, concise white papers with simple, understandable goals.
Look for openness. Investors should expect a company launching an ICO to be completely transparent.
Examine the legal terms and conditions of the ICO. Because traditional regulators generally do not monitor this space, it is the responsibility of an investor to ensure that an ICO is legitimate.
Ascertain that ICO funds are kept in an escrow wallet. This type of wallet necessitates multiple access keys, which protects against scams. Some ICOs require the use of another cryptocurrency to invest in an ICO, so you may need to purchase additional coins to participate in the project.
ICOs can generate a lot of buzz, and there are a lot of forums online where investors can talk about new opportunities. Famous actors, entertainers, and other public figures, such as Steven Seagal, have also encouraged their followers or fans to invest in a hot new ICO.
However, the SEC issued a warning to investors, stating that celebrities using social media to endorse ICOs without disclosing what compensation they received is illegal.
Floyd Mayweather Jr. the boxing champion, and DJ Khaled, the music mogul, both promoted Centra Tech, an ICO that raised $30 million at the end of 2017.
Centra Tech was eventually determined to be a scam in court, resulting in the two celebrities settling charges with US regulators and three Centra Tech founders pleading guilty to ICO fraud.
Before participating in an ICO, investors should become acquainted with cryptocurrency and learn everything there is to know about it. Because ICOs are barely regulated, prospective investors should proceed with extreme caution.
Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)
IPOs raise funds for companies seeking investment and result in the distribution of shares of a company’s stock to investors. For ICOs, crypto companies raise funds by selling coins or tokens. In both cases, investors are bullish on the company or the cryptocurrency, and they invest with the expectation that the asset’s value will rise over time.
The primary distinction between an ICO and an IPO is that investing in an ICO does not guarantee ownership of a crypto project or company. Participants in an ICO are betting that a currently worthless currency will eventually increase in value above its original purchase price.
ICOs may receive funding from risk-tolerant supporters eager to invest in a new, exciting project, whereas IPOs are generally funded by more conservative investors expecting a financial return. An ICO differs from a crowdfunding event in that it allows for long-term financial gain, whereas crowdfunding initiatives only accept donations. ICOs are also known as “crowdsales.”
Advantages and Disadvantages of Initial Coin Offerings
Online services can help with the creation of cryptocurrency tokens, making it extremely simple for a business to consider launching an ICO. ICO managers generate tokens in accordance with the terms of the ICO, receive them, and then distribute the tokens to individual investors by transferring the coins. However, because financial authorities do not regulate ICOs, funds misappropriated due to fraud or incompetence may never be recovered.
Early investors in an ICO are typically motivated by the expectation that the tokens will appreciate in value once the cryptocurrency is launched. The potential for extremely high returns is the primary advantage of an ICO.
However, the legality of cryptocurrency or digital assets is not guaranteed. The People’s Bank of China officially banned ICOs in 2017, deeming them harmful to economic and financial stability.
The Chinese government then banned cryptocurrency mining and declared all cryptocurrency transactions illegal in 2021.
Initial Coin Offering Examples
The ICO of Ethereum in 2014 is an early and well-known example of an initial coin offering. Over the course of 42 days, the Ethereum ICO raised $18 million.
In 2015, Antshares, which later rebranded as Neo, launched a two-phase ICO. This ICO’s first phase ended in October 2015, and the second phase ran until September 2016. During this time, Neo earned approximately $4.5 million.
In another case, Dragon Coin raised approximately $320 million during a one-month ICO that ended in March 2018.
In 2018, the company behind the EOS platform broke the Dragon Coin record by raising $4 billion during a year-long ICO.
The SEC cracked down on an ICO for the first time on December 11, 2017, when it halted an ICO by Munchee, a California company with a food review app. Munchee was raising funds to create a cryptocurrency that could be used to order food through the app. The SEC sent a cease-and-desist letter, classifying the ICO as an unregistered securities offering.
How do you find out when new coins are released?
New coins are listed on numerous exchanges, websites, and aggregators. Coinbase, Gemini, Kraken, CoinGecko, and CoinMarketCap are a few examples. New coins are also announced on social media platforms such as Twitter.
Is it legal to conduct an initial coin offering (ICO)?
ICOs (initial coin offerings) are legal. The ICO, however, is illegal if the project and coin fail the Howey Test, which is used by the Securities and Exchange Commission (SEC) to determine whether an offering is an investment instrument.
What is the purpose of an ICO?
Developing a blockchain and cryptocurrency is an expensive endeavor. Developers must cover the costs of legal counsel, programmers, office space, and other expenses. An ICO is designed to raise funds to cover the costs of developing a blockchain or coin.
Caution! Investing in cryptocurrencies and other initial coin offerings (ICOs) is extremely risky and speculative, and this article is not a recommendation by Samsmeulders.com or the author to do so. Because each person’s situation is unique, it is always best to consult with a qualified professional before making any financial decisions. samsmeulders.com makes no representations or warranties about the accuracy or timeliness of the information provided on this site.