ICO/Initial Coin Offering is a fundraising mechanism wherein new projects sell their underlying tokens in exchange for bitcoin or ether. We all are familiar with the term Initial Public Offering (IPO), wherein companies shares are purchased by investors. And ICOs are kind of similar to IPOs.
Within the blockchain community even though ICOs were a new thing, within no time it became a dominant topic to discuss. A huge number of people look at ICOs as a project that is unregulated or not controlled which allows the founders to raise an unjustified amount of capital. Others view it as an innovation in the traditional venture-funding model.
Recently, the U.S. Securities and Exchange Commission (SEC) has reached a decision regarding the status of tokens issued in the infamous DAO ICO which has forced many projects and investors to re-examine the funding models of many ICOs. The passing or not passing the Howey Test by the token is the main criteria that are considered. If the token passes the test and is considered as security then it is subjected to certain restrictions imposed by the SEC.
The structuring of the ICO is an easy job as technologies like the ERC20 Token Standard exist. the ERC20 Token Standard abstracts a lot of the development process necessary to create a new cryptographic asset. Mostly investors send funds in the form of bitcoin or ether to a smart contract that stores the funds and distributes an equivalent value in the new token at a later point in time, this is how ICOs usually work.
When a token is classified as security there can be a few restrictions imposed. The capital raised in ICOs can be astronomical, as investors from all around the world are investing. The fact that most of the ICOs raise funds pre-product and this a fundamental issue with ICOs. This makes the investments very risky. On the contrary, this style of raising funds is useful and somewhat necessary in order to incentivize protocol development.
Some of the merits of ICOs are as follows:
1. ICO’s (for now) have little regulatory oversight.
As we read before, currently ICOs are unregulated. There is no central authority controlling it. The founder can raise millions of fund without any central authority restricting them.
2. ICO’s are short in duration
ICOs are short duration as compared to IPOs, which are of much longer duration. It is comparatively better as you don’t have to wait for a long period of time.
3. ICO’s are open to anyone.
Another great advantage of ICO is that they are open to anyone and everyone. As compared to IPOs which are exclusive in nature. Because ICOs are open to everyone, it helps to raise funds for a project from different parts of the world.
4. ICO’s promote adoption of the company and its associated services/platform.
Promoting the adoption of the company and the platform or services associated is done by ICOs. Unlike IPOs that only aim to collect a dividend. Promoting the company and the platform helps to gain more investors.