What Is an ICO?

Initial Coin Offering (ICO) means the initial offer (sale) of coins to investors and is a form of raising funds for IT projects (startups). Typically, such a sale takes place in digital currencies, while the IT company receives fiat money from investors in return, usually US dollars.

As part of the ICO, the issuer of coins or tokens receives the necessary investments for the development of his project, offering investors in return certain services in the future, such as software. In addition, investors can also count on the payment of dividends if the business is profitable, as well as income from the sale of purchased tokens if their rate rises.

The main task of the company in the ICO process is to sell as many of its tokens to investors as to be enough to implement the project. This can be done in only one way – by convincing the investor that the project will develop rapidly with the collected investments and the tokens he bought will become very profitable in the future.

The main advantage of a token compared to an equity is that you can buy any share of the token. This property has led many small investors to invest in ICOs.

There are 4 types of tokens:

1) cryptocurrency;

2) rights within the blockchain;

3) assets in the material world;

4) rights in the material world.

Cryptocurrency. The most famous type of such a token is crypto money, for example, Bitcoins (BTC). In essence, the BTC "coin" is the token of the Bitcoin system. 

Rights within the blockchain. In this case, the token is similar to an “entry ticket” or “pass” to the network. 

Let's take an example.There is a project implemented on the blockchain system –  in fact, a closed community, whose members can post important information to the network: passport data, address, date of birth. Other community members check it and confirm – verify. And when a new person wants to check, for example, his business partner, he simply looks at this information and can trust it. At the level of individuals, this seems like a bit of an odd pattern. But when it comes to legal entities, everything immediately becomes much more useful. After all, it is easier to get information about a partner in one reliable place than to collect it in different databases, on websites. This blockchain issues its own tokens. But they are not money at all. These are the keys to enter this system. They can also be used there, for example, for voting.

Another example of a similar yet slightly different use of tokens: developers create a blockchain to store information. After the ICO, those who wish can purchase their tokens, which allows them to use the system. In addition, the number of tokens determines the amount of information that you can upload to the network for storage.

These tokens (in any of the described projects) can be sold. Technically, no one bothers to place them on the exchange and sell them at a certain price (pegged to other cryptocurrencies or fiat money). And then such tokens, in fact, become crypto money.

Assets in the material world. These tokens are more connected to the real world. They are released as if on the security of their products (or services) – completely real, material. For example, some company finds a good sand pit and decides to start sand mining there. But for this it needs money. The company creates the project and issues its tokens. They are sold for cryptocurrency, with the promise that after some time the owners of these tokens will be able to exchange them for sand (kilogram, centner, ton, depending on the number of tokens).

Rights in the material world. Finally, there is another type of token similar to stocks or bonds from the regular economy. Starting a business, you can issue your own tokens (conduct an ICO), announce their price and promise that, for example, in a year you will buy them back twice as expensive or pay dividends to their owners. 

Or you can just represent your super project in such a way that these promises are not required, it is just enough to convince buyers that very soon these tokens will rise in price by 10, 100, 1000 times. And again, tokens in such a situation become a cryptocurrency.

With regard to the latter type of tokens, their release and sale by and large differs little from crowdfunding. Only the collection of funds is carried out in cryptocurrency. And besides, now it can be difficult to get on the crowdfunding platform (serious checks often take place, a legal entity is required, binding to a specific state). In this regard, issuing tokens is a little easier and gives more freedom to both those who issue them and those who buy them.

Another nuance is that when it comes to tokens for the sake of raising funds to start a project or other projects close to the material world, the actual blockchain is not always needed. Tokens are simply sold for cryptocurrencies and then, if necessary, monetized.

Should You Invest in an ICO?

The threshold for entering an ICO is usually minimal; in addition, the project assumes absolute anonymity, i.e. not only other participants in the transaction, but also the tax authorities will not know about your investments in a startup. At the same time, there were cases when the profit from such investments, due to the rapid growth in the price of the token, amounted to hundreds and even thousands of percent per annum.

How Does an ICO Work

Usually, the ICO process includes the following stages:

Preliminary acquaintance – an IT company presents its project and evaluates the interest of potential investors. As a rule, this is done by posting news, press releases on specialized sites (ICO calendars, top ICO lists) and forums, as well as by participating in IT conferences and exhibitions.

Conducting pre-sales – technology companies sometimes hold a pre-ICO before the main sale. Usually this event is not advertised as much as the main sale, and the tokens are sold at a discounted price. The company can use the funds received to increase investments from the main ended ICO, for example, allocate money to finalize a software prototype or conduct a marketing campaign.

The offer is a more detailed proposal for investors. It includes the technical description of the idea, the timing of its implementation, the required amount of investment, the volume of emission of tokens, etc. For this purpose, a business card site for the project is created or a more detailed upcoming ICO presentation is being prepared.

The marketing company is aimed at informing the maximum number of potential investors about the startup and increasing the cost of the project by advertising future benefits of investing and usage of the software being developed.

The start of token sales (or crowdsale) is the final stage of the active ICO. Usually startup tokens can be purchased on the website of an IT company.

Who Can Launch An ICO Offering?

Before investing in a project, the following factors should be considered:

Company leaders must have relevant experience and an impeccable reputation. Check out the team's marketing and social media presence. How many followers does the project have on Twitter? There is a dedicated fan base and a strong community behind many successful projects. The support of large companies in the technology or financial sector is also a good indicator of a company's success.

The startup itself must be officially registered as a legal entity.

The idea of a startup should be clear, have value for future users and be promising. Having a working prototype of future software reduces the risk of investment.

It is also worth carefully studying the team of founders and executors of the project.What experience do the team members have? Do they have social media and LinkedIn profiles? What was the team's previous work? The big advantage is that the team members have worked with cryptocurrencies before.

It is necessary to carefully read all the agreements and rules for a future transaction, which IT companies often place on the project website in the form of a public offer.

It is necessary to have a well-written whitepaper – a presentation of the project with a detailed description of the technical and marketing aspects of the startup. It is important not just to buy promoted coins. Read the content of the whitepaper, study the goals of the project and problems it should solve. 

It is necessary to have a clear roadmap with a description of the stages of project development and their observance by a startup. The project roadmap is very important. Careful consideration should be given to whether the founding team of the project is able to achieve the goals set in its original planning. This gives you an idea of whether the team's goals are realistic and achievable. If a project does not have a roadmap, it is better not to consider funding it.

The project has an escrow account, which implies the transfer of funds to a startup, only if the IT company fulfills its obligations.

All this will also help to weed out scams – fraudulent projects, the purpose of which is to raise funds through crowdfunding for the personal enrichment of their owners without further implementation of the idea.

What are the differences between ICO and IPO

If we compare two ways of raising funding, then the main differences between ICO and IPO are as follows:

1) The ICO token, as a rule, is not connected in any way with a share in the capital of the company. It does not give voting rights or project management rights;

2) In most ICO cases, it is not an operating business that is is sold, but only promises, ideas and plans;

3) Many jurisdictions are characterized by the uncertainty of the status of crypto assets and companies conducting ICOs, and the rights of buyers are not regulated.

Unlike shares that are sold in the IPO process, ICO tokens have significant advantages:

1) They can be easily split/summed up – such operations usually do not work with shares, but here we have 100 million “cents” in each token. You can split or summarize them as many and as you like;

2) Tokens are anonymous – information about the owner is not stored anywhere. This is very relevant if you do not want to disclose data about your investments and their size;

3) Simplicity and ease of turnover: you decide to sell 3% of your tokens and transfer them from your crypto wallet to the buyer’s wallet like ordinary electronic money. A minute or two  – and the transaction is completed. If you have ever sold shares in a company, you understand what a huge time and nerve saver it is.

 

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