What is an ICO?
An Initial Coin Offering, or ICO, is a fundraising mechanism. New projects or companies sell their underlying crypto tokens in exchange, that investors can buy with bitcoin, ether and in some cases fiat currencies ( USD). There are some similarities to the more traditional and well known stockmarket listing (Initial Public Offering, or IPO).
ICOs have quickly become a dominant topic of fundraising for projects within the blockchain community, despite being quite new.
There is a stong debate going on about the pro’s and con’s of ICOs.
In essence, ICO projects are unregulated securities that allow founders to raise an amount of capital that is usually much higher than with traditional fundraising. On the other hand, it is an innovation in the traditional venture-funding model that provides access to capital for projects and companies that otherwise may not have this access.
The U.S. Securities and Exchange Commission (SEC) decided to force many projects and investors to re-examine the funding models of many ICOs.
All ICO’s need to check if the token or coin passess the Howey test. In the event they pass the test, the SEC regards it as a security and imposes restrictions.
Most ICOs have investors send funds (usually bitcoin or ether) to a smart contract that stores the funds. In return, the investors receive a certain amount of new tokens at that time or a point later in time.
Thanks to the ERC20 Token standard, setting up and organizing an ICO is relatively easy, hence the 1200+ tokens on the market.
As long as the token is not a security, pretty much anyone can participate in an ICO. And as ICO’s have a global reach, the amounts raised can be much higher than in traditional funding methods.
But investors should not forget that ICO’s and crypto currency markets are unregulated and therefore very risky and speculative. There are many cases of market manipulation and insider trading.
And for the legitimate projects the risk is still high, as most are pre-product and merely have a ‘white paper’ and a small team.
Want to learn more about ICO’s or blockchain in general, we recommend you these books: