The phenomenon of Initial Coin Offerings, which could be translated as “Public Coin Offer”, appeared as early as 2014. It was born with the Smart Contracts issuing platforms such as Ethereum but experienced a real explosion in 2017. But what exactly is an ICO?
ICOs are still little known, yet the movement is such that legislators have created a legal regime specific to this emerging asset class. CIOs will obviously revolutionize the way businesses and individuals obtain financing. We are simply witnessing the democratization of finance.
The purpose of this article is to give you a real understanding of what Initial Coin Offering is all about. But also to understand the scope of the movement and how it differs from current means of financing.
What is an ICO?
Raising funds and publicizing a project
ICO for Initial Coin Offering, is a decentralized process for selling tokens also called “tokens” or “coins”. The objective is to finance and promote a project generally based on a blockchain. Another important objective is to increase the size of the community.
We use “generally based” because more and more projects are using ICOs when they are not based on a blockchain themselves. This is particularly the case for Security tokens, which we will see in detail.
Fundraising is obviously the primary objective, but it is also about increasing the community. It is indeed a vital element for ecosystems based on a blockchain. An ICO is usually an opportunity to develop the user base.
French law, which is a pioneer in this area, offers the following definition: “An offer to the public of tokens consists of proposing to the public, in any form whatsoever, to subscribe to these tokens. An offer of tokens to the public does not include an offer of tokens open to subscription by a limited number of persons, set by the general regulations of the Autorité des marchés financiers, acting on their own behalf”. As can be seen, this definition is rather broad and is intended to cover all possible types of token sales.
ICO: a name that deliberately defies traditional finance
The term “ICO” is used in reference to Initial Public Offering (IPO), whereby companies of a certain size open their capital to the public in order to raise funds. In the case of IPOs, investors buy shares in the company that give them legal and financial rights in the company. The rights granted when you hold tokens are often very different from the rights granted by traditional shares.
An ICO offers the opportunity for the general public to purchase project tokens very early in the project development process. This means that if you believe in the vision of the people carrying the project and wish to support them, you can acquire their tokens directly and without intermediaries, even though no prototype has yet been developed.
The ICO mechanism has a number of advantages, but also disadvantages.
Advantages of an ICO
Participate in the project at an early stage
ICOs offer the possibility of participating in the financing of projects at a much more advanced stage than in current IPOs, i.e. without being excluded by venture capital companies.
As will be described below, an IPO comes much later in the development of a project, i.e. when it has already proven its worth. But before this stage, only certain privileged people can buy shares in the company (managers, privileged investors – venture capital companies or high net worth individuals – and sometimes employees). With ICOs we can invest in the project from the very beginning, which is a great novelty, but also involves much greater risks since you don’t know whether the project will prove itself or not.
Direct link between entrepreneurs and investors
ICOs are indeed carried out from decentralized platforms such as Ethereum. It is the entrepreneurs who will create the tokens and sell them directly to investors. This is another important novelty, since you are now in control of your investment from beginning to end. From the purchase of the tokens to their conservation in “cold storage”. This is an important advantage, but also a responsibility because you can also make mistakes in handling the tokens.
An emerging asset classes
Cryptocurrency is a growing asset class but still in its infancy. It is therefore interesting to get started now in order to benefit from good opportunities.
Disadvantages of an ICO
Numerous scams
The ICOs are not yet well framed technically or legally. The current craze for crypto money attracts a significant number of fake projects whose sole objective is to collect money and leave with it.
A high-risk investment
As we have mentioned, investing in an ICO is very early in the project development process. However, a considerable number of the projects making an ICO will fail and disappear. It is therefore essential to be able to identify and invest only in high-potential projects that have teams that are sufficiently structured and trained to carry the project.
It is therefore essential not to get carried away by what Anglo-Saxons call the FOMO or “Fear of missing out”. In other words, buy tokens for fear of missing out on an opportunity, in a hurry and without having done a thorough analysis of the project.
Uncertainties regarding financial and tax regulations
It is still unclear at present what positions the tax and financial administrations will take on ICOs. In France, the legislator has decided to put in place a legislative framework to regulate ICOs and protect investors, but France is a pioneer in this area, and this is far from being the case in all countries. At present, the number of ICOs issued from France is still marginal compared to the total number of ICOs that appear every day. So, you have to take into account the fact that you can participate in ICOs without any protection from the regulatory authorities of a state. This is not a problem when all goes well, but if the ICO turns out to be a scam, the means of recourse will be almost non-existent.
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