The term Initial Coin Offering (ICO) derives from the more well-known expression IPO (Initial Public Offering) to designate fundraising in crypto money.
It can be to finance a new blockchain but in most cases it is to issue a token (digital value token), or to create a decentralized application based on an existing blockchain such as Bitcoin, Ethereum or NXT.
What is Blockchain?
Blockchain is an exciting new technology that allows for blocks of data to be recorded and stored in a chain. As each new block is added, it creates an uninterrupted digital ledger. Due to each transaction requiring validation by the entire network, they cannot be approved without the agreement from at least 51% of the nodes.
Since each node on the network has a complete record of the ledger and computes every transaction independently, decentralized applications are tamper-proof and ultimately far more secure.
Unlike IPOs, which are regulated and where the issuing company is bound by several legal obligations, in the wonderful world of crypto money, start-ups can adopt a multitude of legal structures and set up via ICOs inexpensive, accessible to all, faster and more efficient participatory fundraising campaigns (crowd sales) than financing via banks or venture capital funds. This unregulated environment is both an advantage and a risk for both the entrepreneur and the investor.
Fundraising is done online. In most cases, the organization communicates around its project, notably by providing its whitepaper (the roadmap outlining the goal and the different stages of the project), by presenting the team that develops the token, its source code, the terms of issue, etc…
An ICO is therefore an alternative means of financing a company: in this new business model, the approach to the blockchain startup market is centered on the circular economy and the needs of a well-defined ecosystem. ICO usually starts before the project is completed, so investors are totally dependent on its eventual success. The participants are therefore often sympathizers (who through this direct involvement will have a natural tendency to defend the project and become involved in it) and speculators motivated by the profit that may be generated if the value of the tokens purchased exceeds the ICO price. Thanks to cryptomoney, anyone can therefore bet the amount he wants on the project he wants.
The issued tokens can confer to the holder dividends on any profits generated by the startup, or voting rights, etc… We distinguish by convention two main categories of tokens of value:
- Tokens with a specific function in the business model of the issuing company (utility tokens). For example, they can be the only means of payment for certain services offered by the company.
- Securities tokens: Tokens that give the right to dividends related to the profits generated by the issuing company (securities tokens). They are very similar to financial securities, so the legislation governing them will probably be more restrictive.
The ICO is therefore a means, a beginning and not an end.
Source: Fundraised via ICOs between 2013 and 2016 – Source: Smith + Crown
Operation of an ICO:
- Presentation of the project: whitepaper, objectives, roadmap, team and previous experience of its members,
- The dynamics of the ICO is set up by the team: duration of the crowd sale, setting of an upper limit (cap) or not, allocation of tokens,
- Announcement of the fundraising via the media and social networks,
- Fundraising in cryptography (typically via Bitcoin or Ether),
- End of the ICO and launch of the project: the token is listed on the exchange platforms that accept it.
- ICOs are risky and unregulated fundraising, generally there are no guarantees for the investor.
- It is much more difficult for an investor to get an idea of the relevance and quality of a startup rather than an existing company that has already marketed several products. The reliability of the team around the project under consideration is therefore a very important parameter.
- The real usefulness of a new token is not always up to the promises made.
- Many hackers use all possible and unimaginable phishing techniques such as identity theft to mislead the investor and steal his private keys during ICOs. Paranoia is the order of the day.
- This type of investment is therefore reserved for seasoned, risk-averse, responsible investors, investing funds they can afford to lose.
Some examples of ICOs:
Early readers may remember Gold Fever 2.0 and the series of articles dedicated to NXT and its incredible fundraising!
The first project that was funded through an ICO was Mastercoin, now Omni. The crowdsale of the Scottish startup attracted in 2013 about 5000 bitcoins of investment. As for the MaidSafe project developed via their platform, the ICO raised over $7 million in funding.
The Ethereum project is obviously a typical example of a successful ICO: with the equivalent of more than $18 million invested at the base, Ethereum’s total capitalization represents nearly $4 billion to date.
The most infamous ICO to date remains the DAO: after an extraordinary fundraising (more than $150M, the absolute record), a hacker detected a flaw in the source code and ended the adventure by siphoning off part of the ethers invested. The Ethereum community then decided on a controversial hard fork in order to reimburse the investors; this decision was controversial and divided the blockchain in two. The DAO case should serve as a warning to both the team organizing an ICO and the investor who subscribes to it!
This new series of articles will present the fundraising events that caught the attention of the BitConseil team. While some team members may have participated as individuals, this is not investment advice but information about different projects using a new model of participatory financing. Bit Conseil disclaims any responsibility for the possible loss of funds that could be linked to a project presented in this section.
Would you like to get more information for Initial Coin Offering (ICO), please contact us today. Our experienced team will help you.