What is ICO? The Latest Premier Guide 2024

What is an Initial Coin Offering (ICO)?

An Initial Coin Offering (ICO) in the cryptocurrency industry is equivalent to an Initial Public Offering (IPO). Companies seeking to raise funds to create a new coin, application, or service can launch an ICO as a way to raise capital.

Interested investors can buy into the ICO to receive new cryptocurrency tokens issued by the company. The token may have some utility related to the product or service offered by the company or represent a stake in the company or project.

Key Points

• An Initial Coin Offering (ICO) is a popular way to raise funds for products and services typically related to cryptocurrencies.
• ICOs are similar to Initial Public Offerings (IPOs), but the tokens issued in ICOs can also be used for software services or products.
• Some ICOs have delivered returns for investors. Many others have been proven to be fraudulent or underperforming.
• To participate in an ICO, you typically need to first purchase a more established digital currency and have a basic understanding of cryptocurrency wallets and exchanges.
• ICOs are largely unregulated, so investors must exercise a high degree of caution and diligence when researching and investing.

How Initial Coin Offerings (ICO) Work

When a cryptocurrency project wants to raise money through an ICO, the first step for the project organizers is to determine how to structure the tokens. ICOs can be constructed in several different ways, including:

• Static Supply and Static Price: A company can set a specific funding goal or cap, meaning each token sold in the ICO has a preset price, and the total token supply is fixed.
• Static Supply and Dynamic Funding Goal: ICOs can have a static token supply and a dynamic funding goal—meaning the total amount of funds received in the ICO determines the overall price per token.
• Dynamic Supply and Static Price: Some ICOs have a dynamic token supply but a static price, meaning the amount of funds received determines the supply.

White Paper Release

Besides structuring the ICO, crypto projects typically create a promotional document (known as a white paper in the crypto industry) and offer it to potential investors through a new website dedicated to the token. The project’s initiators explain essential information related to the ICO in their white paper:

• What the project is about
• The needs the project will fulfill upon completion
• How much money is needed
• How many virtual tokens the founders will keep
• What type of payments will be accepted (which currencies)
• How long the ICO campaign will last

The project releases a white paper as part of its ICO activity, aiming to encourage enthusiasts and supporters to buy some of the project’s tokens. Investors can usually buy new tokens with fiat money or digital currency, and it’s becoming increasingly common for investors to pay with other forms of cryptocurrency (such as Bitcoin or Ethereum). These newly issued tokens are similar to the shares sold to investors during an IPO.

What Happens if the Fundraising is Insufficient?

If the funds raised in the ICO fall below the ICO’s minimum requirements, the money may be returned to the project’s investors. The ICO would be considered unsuccessful. If the funding requirements are met within the specified timeframe, the raised funds will be used to achieve the project’s goals.

Who Can Launch an ICO?

Anyone can launch an ICO. Currently, there is little regulation in the US for ICOs, and anyone who can get the appropriate technology can freely launch a new cryptocurrency.

However, the lack of regulation also means that someone might go to great lengths to convince you they have a legitimate ICO, then abscond with the money. Of all possible funding avenues, ICOs might be one of the easiest to set up as a scam.

Buying Into ICOs

If you’re considering buying into a new ICO you’ve heard about, it’s crucial to do your homework. The first step is to ensure the people launching the ICO are real and accountable. Next, investigate the history of the project leaders in using cryptocurrency and blockchain. If the project seems to involve no one with relevant and easily verifiable experience, that’s a red flag.

Even though anyone can set up and launch an ICO, this does not mean everyone should. Therefore, if you’re considering organizing an Initial Coin Offering, ask yourself if your enterprise would significantly benefit from it.

Special Considerations

ICO activity began to decline sharply in 2019, partly because ICOs exist in a legal grey area. Investors can research and find ICOs to participate in, but there’s no foolproof way to keep up with all the latest Initial Coin Offerings. Websites like TopICOlist.com and others that compare different ICOs can be used.

Important: The U.S. Securities and Exchange Commission (SEC) can intervene in ICOs if necessary. For example, after the creators of Telegram raised $1.7 billion through ICOs in 2018 and 2019, the SEC took emergency action and obtained a temporary restraining order, accusing the development team of illegal activities. In March 2020, the U.S. District Court for the Southern District of New York issued a preliminary injunction. Telegram was ordered to return $1.2 billion to investors and pay a civil penalty of $18.5 million.

There is no guarantee that investors will not suffer losses from scams when investing in ICOs. To help avoid ICO scams, you can:

• Ensure the project developers can clearly define their goals. Successful ICOs usually have a straightforward and understandable white paper as well as clear, concise goals.
• Look for transparency. Investors should expect the company launching an ICO to have 100% transparency.
• Review the ICO’s legal terms and conditions. Since traditional regulatory bodies typically do not oversee this area, investors are responsible for ensuring the legality of the ICO.
• Ensure ICO funds are stored in escrow wallets. This type of wallet requires multiple access keys, which can effectively prevent scams.

Some ICOs require investing in the ICO using another cryptocurrency, so you may need to purchase other tokens to invest in that project.

ICO Hype

ICOs can generate a lot of hype, with many websites available for investors to gather and discuss new opportunities. Celebrities, artists, or other public figures like Steven Seagal also encourage their followers or fans to invest in hot new ICOs. However, the SEC has warned investors that celebrities using social media to endorse ICOs without disclosing their compensation is illegal.

Boxing superstar Floyd Mayweather Jr. and music mogul DJ Khaled had promoted Centra Tech, an ICO that raised $30 million by the end of 2017. Centra Tech was eventually found to be fraudulent in court, leading to a settlement with U.S. regulators by the two celebrities, and three Centra Tech founders also admitting to ICO fraud charges.

Investors seeking to participate in ICOs should familiarize themselves with cryptocurrencies and understand everything about ICOs before participating. Since ICOs are largely unregulated, potential investors should be extra cautious when investing.

Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)

An Initial Public Offering raises funds for companies seeking capital from investors and distributes company shares to investors. For ICOs, cryptocurrency companies raise funds by selling coins or tokens. In both cases, investors are optimistic about the company or cryptocurrency and invest based on the belief that the asset’s value will increase over time.

The main difference between ICOs and IPOs is that investing in an ICO does not guarantee ownership of the crypto project or company. ICO participants are gambling that a currency currently worth nothing will later appreciate to a value higher than its original purchase price.

While IPO funds are usually provided by more conservative investors expecting a financial return, ICOs might receive funding from risk-tolerant supporters eager to invest in new, exciting projects. ICOs differ from crowdfunding campaigns because they offer the possibility of economic gain over time, whereas crowdfunding campaigns accept donations. ICOs are also known as “crowdsales.”

Advantages and Disadvantages of Initial Coin Offerings

Online services can facilitate the generation of cryptocurrency tokens, making it very easy for companies to consider launching an ICO. ICO managers generate tokens based on the terms of the ICO, receive the tokens, and then distribute the tokens by transferring them to individual investors. However, due to the lack of regulation by financial authorities, funds lost due to fraud or incompetence may never be recovered.

Early investors in ICOs are usually motivated by the expectation that the tokens will appreciate in value after the cryptocurrency launch. This is the main benefit of ICOs: the potential for very high returns.

However, the legality of cryptocurrencies or digital assets cannot guarantee their continued existence. In 2017, the People’s Bank of China officially banned ICOs, criticizing them as detrimental to economic and financial stability. In 2021, the Chinese government continued to ban cryptocurrency mining and declared all cryptocurrency transactions illegal.

Examples of Initial Coin Offerings

Ethereum’s ICO in 2014 is a notable example of an early token offering. The Ethereum ICO raised $18 million over 42 days. In 2015, a company called Antshares, which later renamed to Neo, began a two-stage ICO, with the first stage ending in October 2015 and the second stage lasting until September 2016. During this period, Neo earned about $4.5 million.

Another example is Dragon Coin, which raised approximately $320 million in a one-month ICO ending in March 2018. Also in 2018, the company behind the EOS platform raised up to $4 billion in funds over a year-long ICO, breaking Dragon Coin’s record.

The SEC’s first action against an ICO occurred on December 11, 2017, when the agency halted the ICO of Munche

e, a California company with a food review app. Munchee attempted to raise funds to create a cryptocurrency that could be used for ordering food within the app. The SEC issued a cease letter, viewing the ICO as an unregistered securities offering.

How Do You Know When a New Coin is Launched?

Many exchanges, websites, and aggregators list new tokens. Examples include Coinbase, Gemini, Kraken, CoinGecko, and CoinMarketCap. You can also find newly launched coins on social media platforms like Twitter.

Is Initial Coin Offering (ICO) Legal?

Initial Coin Offerings (ICOs) are legal. However, if the project and tokens do not pass the Howey Test used by the U.S. Securities and Exchange Commission (SEC) to determine if the issuance is an investment contract, then the ICO is illegal. This action might be conducted through a Simple Agreement for Future Tokens (SAFT) by the developers.

Bottom Line

Creating blockchain and cryptocurrencies is a costly endeavor. Developers must pay legal advisors, programmers, facilities, and other expenses. ICOs aim to raise funds to cover the costs incurred during the development process of the blockchain or tokens.

References

Wikipedia