What is Initial Coin Offering (ICO)?

What can one do to start a cryptocurrency project? Right, to prepare the initial capital to hire the needed specialists, to develop the project infrastructure, and to launch a respective marketing campaign to make the project move on.

But what if this enthusiast doesn’t have sufficient funds? In such a case, an ICO can be a solution.

An ICO, or an Initial Coin Offering, is a fundraising method. It is usually applied by startups to launch a new blockchain-based product or project.

The first ICO took place in 2013. It was held by Mastercoin. Further, Ethereum managed to raise 3,700 BTC within the first 12 hours of their ICO (almost $2.3 mln).

ICOs became especially popular in 2017 during the famous Bitcoin rally. Just as an example, in 2017, ICOs managed to raise 40 times more funds than in 2016. A record of $7 billion was raised from January till June 2018.

Yet, about 80% of ICO projects failed or were outright scams. This was the main reason why regulators started paying more attention in an effort to make the field more regulated and protect users from increasing scam cases. In 2019, total funding to ICOs plummeted to $371M. Equity funding overtook them as a new primary funding method for blockchain and crypto startups.

Nevertheless, ICOs didn’t disappear completely. In 2022, they remain a valid option to raise funds for a crypto-project launch or its development even though the funds raised aren’t that high anymore. New coins are emerging, and established projects are introducing new features. Here are just a few examples of more recent ICO projects:

The first Polkadot crosschain DEX for energy trading aims at providing an easy way for new projects to start and raise funds.
API3 ICO - a decentralized API for Web 3.0.
NFThistory is raising funds to create the world’s first marketplace to buy and sell data.

How Does ICO Work?

You start with a website and a white paper. At the very start, the white paper will play a crucial role. That’s why make sure it explains the following points:

It tells clearly the project purpose, what it is about.
What needs the project addresses.
How much money is needed to drive the project to success.
What type of money is going to be accepted within the ICO.
How many tokens will be kept by project founders.
How long the ICO will run.

The website serves at this stage to provide access to the white paper, to explain why the project is worth investing in, to display the project’s roadmap, if any, and to display the countdown for the ICO.

Then, you announce the ICO (basically, you are asking all those who might be interested in the project to send you money - fiat or crypto - in exchange for your tokens). People buy your tokens in hope that, in some time, the project will become valuable enough for the token price to grow. Then, they can either keep their tokens in the hope of further value growth or sell them and earn profit.

If you collect the needed funds within the time assigned for your ICO, you spend the funds on the project as planned. If the needed funds are not collected, the ICO is considered as the one that failed, and you return the funds collected from the token sale (ICO) to the investors.

Types of Initial Coin Offerings

There are two main types of Initial Coin Offering: Private ICO and Public ICO

Private ICO

Only a limited number of people can participate in a private ICO. Usually, the participants of a private ICO are financial companies or high-net-worth individuals. The company can set the minimum investment amount to ensure the success of the ICO.

Public ICO

Public Initial Coin Offerings target a wide audience and, in this regard, they resemble crowdfunding campaigns. Almost anyone can invest in a project with a public ICO.

Alternatives to ICO

Many regulators are worried about ICO because they believe that Initial Coin Offerings are circumventing the existing investment regulations. The breach is in the fact that many startups disguise security tokens for utility tokens.

Security is an investment contract. People buy securities because they expect some profit in the future.
Utility tokens provide users with access to the product.

At the launch, startups don’t have a product. However, they promise profit from the tokens in the future. So, the tokens offered in an ICO are legally security tokens rather than utility tokens.

However, such tokens don’t fulfill the legislation requirements about registration and reporting. So, their sale is illegal. While cryptocurrency is not regulated properly, in some cases, an ICO would end in a legal case. An example is the ICO organized by Telegram owners. When they raised over $1.7B in an ICO, their activities were announced illegal for the above-mentioned purpose.

How can one raise funds without entering an ICO?

There are several alternatives to choose from.

Security Token Offering

A startup shall declare their tokens as securities, register them as required, and announce an STO, or Security Token Offering. tZero, Polymath, and Corl are the blockchain projects that have successfully used an STO for fundraising.

DAICO (ICO based on DAO-model)

In the case of an ICO, smart contracts are used to allow investors to send their funds in return for tokens. And that's it. The function of a smart contract is over. If a team decides to vanish with the collected funds, there is no legal power over them.

In the DAICO model, the smart contract consists of two parts.

The first part enables investors to contribute to the project within a specific limit. Once the limit is reached by an investor, they cannot make more contributions.
The second part comes into force after the funding stage is over. The smart contract sets a withdrawal limit for the team. The token holders (those who have invested in the project) have a right to vote. They can raise the withdrawal limit, lower it, or even self-destruct the smart contract. In the latter case, the remaining funds are refunded to investors. This option might happen if the investors aren’t happy with the project’s progress.

Along with these alternatives, there are many more complex options to ensure the legal compliance of your fundraising processes or to secure the funds you are going to invest in a cryptocurrency startup.

ICO vs IPO

While many compare ICO with IPO, this comparison is correct to some extent only. While both are used to raise funds, they have some crucial differences.

IPO is mostly used by traditional companies to get some financing from investors. IPO is selling shares of the company. Usually, investors participate in an IPO.

ICO is mostly used by crypto- and blockchain startups. In the case of an ICO, a company doesn’t sell its shares. It sells its tokens. Both investors and those interested in the project can participate. In this regard, an ICO is frequently compared to a crowdfunding campaign. The only difference is that in the case of an ICO, participants hope for returns in the future (that’s why ICOs are also called crowdsale) while in the case of crowdfunding, we speak about donations.

Examples of Initial Coin Offerings

Many big blockchain and crypto projects started out with an ICO. One of the most popular examples of an ICO was the smart contracts platform called Ethereum with its token called Ether. The ICO allowed the startup to raise $18 million in Bitcoins. One year later, the Ether price surged from 0.40 to 14 USD. Now, 1 ETH is worth more than $2,000.

Filecoin is another example of how much a promising project can raise in ICO. Filecoin aims at creating a blockchain-based infrastructure that allows decentralized data storage. This ambitious project raised $135 during the first hour of the ICO and managed to raise $257 million in total.

SirinLabs is one more successful project. The project raised over $100 million within the first 24 hours of the ICO and then reached a whopping total of $157.8 million.

Pros and Cons of Initial Coin Offerings

For a startup, entering an ICO means a chance of raising the needed funds for the project development. Here, we don’t see any major drawbacks. Even if the ICO fails, the team doesn’t lose anything but their ambitions.

However, for an investor, participating in an ICO is pretty risky. It means investing money (it can be fiat money or another crypto - usually, well-established cryptocurrencies such as Ethereum, Bitcoin, Litecoin, etc., are accepted) into something that doesn’t have any value yet. You even don’t know whether it is going to have any value in the future. It is not even a share of the company, it is just a virtual coin, a token that is worthless at the moment.

How difficult is it to create such a token? Well, it is pretty easy. There are services that allow creating a lot of tokens within seconds. Investing in such a token is connected with increased risks. The only reason you are buying the token is the hope that the project behind it will succeed and the token price will climb.

Even though participating in an ICO is risky, many people do it. So, there shall be benefits, too.

The main benefit is the possible potential of the project. If the project succeeds, the token will grow in value, and you will be able to sell it at a much higher price (remember Ethereum?)

How to Participate in ICO?

Participating in an ICO usually requires a few simple steps:

Through the project’s website, register for ICO participation (some projects don’t require registration, it is better not to risk your funds in such a case).
Buy Bitcoin or Ether (these cryptocurrencies will for sure be accepted, and you can buy them on LetsExchange.io without any issues);
When the ICO starts, buy the ICO tokens;
Get the ICO tokens to your wallet and keep them to see if they grow in price.

Do I Need Initial Coin Offering?

Everybody can organize an ICO. But it doesn’t mean that everybody shall do so. When deciding whether you need an Initial Coin Offering, consider the following details:

Think about whether you know enough about cryptocurrency and blockchain. ICO is an instrument used in crypto and blockchain projects. If you don’t have sufficient knowledge about them, most likely, organizing an ICO is not what you shall opt for.
Check whether your business can benefit from an ICO. If you believe that your project is going to disrupt the existing state of things, go for an ICO. If not, look for other funding options.
Make sure you can hook the potential investors from the first page of your white paper. If it is not the case, your ICO will fail.
If you are still willing to try it, consult with specialists and start working on your white paper.

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