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What Is an ICO? Everything You Need to Know

If you’ve ever heard of IPOs, initial public offerings that the world’s largest companies and start-ups use to raise capital, understanding ICOs should be a cinch. ICOs are the cryptocurrency world’s spin on IPOs: initial coin offerings.

However, ICOs work a little differently than IPOs. To understand the specifics, let’s first take a look at the ins and outs of ICOs and how they work in the crypto world.

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What’s an IPO?

An IPO, or initial public offering, is when an unlisted or private company offers shares of its company to investors to become a public company and raise capital. Unlisted companies aren’t listed on the stock market. These companies become public when shares are listed and sold on a stock exchange.

Companies usually hire investment banks to sell their "vision," assess customer demand, and determine IPO pricing, among others. A company that wishes to launch an IPO must meet the requirements set by the U.S. Securities and Exchange Commission (SEC) and stock exchanges.

A company partaking in an IPO is a significant stride forward as it opens the possibility of substantial capital raising. This increases the company's capacity for development and growth. Additionally, the enhanced accountability and transparency of the public stock exchange share listing may allow the company to achieve better terms when looking for borrowed capital.

What’s an ICO?

ICO, or initial coin offering, is a method of raising funds for crypto ventures. Companies use ICOs to raise capital for new businesses. Individuals who invest in ICOs receive cryptocurrency tokens in return for their support. It’s essentially the “crypto version” of an IPO. However, companies offering ICOs issue new crypto tokens instead of stocks or shares to investors. These token offerings may come in the form of security or utility tokens.

Entities that perform ICOs generally show their business plan or other information to attract investment. The hope is that individuals will look at the provided materials and decide it is worth it to invest in the endeavor. This is much like an IPO.

ICO red flags

ICOs, like other digital currency ventures, are unregulated. This means they lack the supervision or oversight of a central authority like a bank or a government. As a result, scammers have used fraudulent ICOs to fool investors. If an investor invests in an ICO and gets scammed, there’s little-to-no recourse to get their funds back.

Here are some red flags to look for when you come across an ICO:

No public code for open-source projects

One of the main characteristics of cryptocurrency projects—which usually exist on blockchains—is that they offer open-source codes. This means the algorithm and code used to build blockchain technology are available on online repositories for public viewing. Individuals with programming expertise can determine a project's legitimacy by analyzing its source code.

A repository is an online portal where programmers and developers exchange code and keep track of changes made to a blockchain's source code over time. For example, an entity offering an ICO lacks transparency over its open-source code or doesn’t make it publicly available. In that case, the entity may not be as legitimate as it claims or is nascent in its developmental stage.

Anonymous development

Transparency and accountability are some of the most important qualities to consider when it comes to investments. Any entity looking to raise funds should make it a straightforward process for those looking to learn more about the people behind the ICO, their background, achievements, and specifics on how the ICO funds will be utilized.

If you find this information challenging to obtain, it may be a sign of the entity being dishonest about its goals and objectives.

Faulty whitepaper

A whitepaper is a document that describes a legitimate ICO's objective, vision, and other essential information. Whitepapers are essentially an embodiment of the entity’s philosophy and long-term ambitions. Some reputable ventures—like Bitcoin (BTC) and Ethereum (ETH)—include a technical report outlining the project's underlying technology with a detailed whitepaper summarizing its main features. Any entity that fails to publish a whitepaper or has a whitepaper that lacks clarity is a red flag.

Unclear roadmap

ICO ventures generally provide investors with a detailed timeline showing their fundraising and expansion objectives. The lack of a defined roadmap could signify that the entity’s ICO is focused on short-term benefits.

However, scammers can fabricate fake roadmaps or post illegitimate announcements on public forums. While the absence of a roadmap is unquestionably concerning, its presence alone doesn’t prove the ICO's legitimacy.

Unrealistic expectations set by developers

Users should avoid any entity making exaggerated claims about goals and ambitions. ICO scams may give investors empty promises about what they’ll accomplish with the money raised. In reality, the entity may not have clear and realistic goals and is simply looking for short-term financial goals from the ICO.

How do ICOs work?

Like IPOs, ICOs enable companies to raise money but in the form of cryptocurrency. Here’s a quick outline of an ICO’s roadmap:

  1. An entity announces a new crypto project for which it needs investments. 
  2. The entity publishes a whitepaper outlining the project’s vision, ambition, and objectives. The whitepaper includes technically detailed information on every aspect of the project, including the development and team behind it. It also offers full transparency about the funds’ utilization, future plans, and what investors receive in return. The goal of this is to attract investment.
  3. The entity may employ an investment bank to handle the technicalities, proceed with the marketing to raise awareness on social media, and get started on a public stock exchange listing, should it be a successful ICO.
  4. Investors offer the entity their money and receive crypto tokens for their investment.
  5. The fresh funds go toward the new crypto venture or are used to improve on an existing one.

For example, an entity wants to raise capital for its newest NFT (non-fungible token) venture, Entertained Gorilla Boat Store, or EGBS (the name’s inspired by the Bored Ape Yacht Club), which uses a native token called Gorilla XP to power the NFT on its blockchain. The entity participates in an ICO where it offers investors Gorilla XP in exchange for capital. Investors can then spend Gorilla XP on the NFT's blockchain or trade it for other cryptocurrencies.

ICO structures

Companies that partake in ICOs must figure out another crucial component—the structure. ICOs come in three structures:

  • Static Supply + Static Price: Here, an entity limits the total token supply, and every token sold has a predetermined price. This structure has a fixed financial goal on how much capital the entity wants to raise.
  • Static Supply + Dynamic Price: In this scenario, an entity has a fixed token supply with a variable goal, meaning each token's price depends on the overall capital raised.
  • Dynamic Supply + Static Price: In this, an entity sets a fixed price on each token but doesn't have a set number on the tokens supplied to investors. As a result, the entity decides the supply based on the overall capital raised.

ICOs vs. IPOs

ICOs receive cryptocurrency as funds and offer native tokens in return for investments. In contrast, IPOs receive fiat currencies in exchange for company shares. Besides this, the main difference is that ICOs function on the concept of decentralization, which means they lack central authorities like banks, governments, or other financial institutions regulating them. IPOs, on the other hand, are fully centralized investment vehicles that require registration with a regulatory body to become a legal and viable public company on the stock exchange.

While legitimate crypto ventures publish whitepapers alongside their ICOs, IPOs must submit a legal document known as a “prospectus,” which must adhere to specific disclosure requirements and offer investors full transparency. This serves as the company's official legal announcement of its intention to sell shares to the general public. The prospectus must also provide important details about the venture, its philosophy, and the intended use of funds for its planned IPO to help potential investors make an educated choice.

Decentralized and unregulated Centralized and regulated
Receives capital in the form of cryptocurrency, giving investors tokens in return Receives funding in the form of fiat currency in exchange for company shares
Companies generally publish a whitepaper Companies publish a prospectus

Is ICO just a type of crowdfunding? 

ICOs are a loose form of crowdfunding, which occurs when the general public and other investors offer donations to a project or cause without expecting anything in return. ICOs provide scope for returns in the form of financial gains through cryptocurrency tokens.

ICOs are also called “crowdsales,” a new term that refers to the act of investors engaging in token sales with digital assets. ICO investors usually expect something in return for their participation, which binds them to the crypto project, as the tokens they receive may have utility in the project or governance abilities. Crowdfunding donors generally donate to support a cause but aren’t bound to the project financially. The money that they send doesn’t give them utility in return. 

Wrapping up

ICOs can be a complicated process for newcomers, especially when it’s difficult to gauge a company’s authenticity. It’s difficult to ask someone for their money when you can’t guarantee returns.

At Worldcoin, we can guarantee cryptocurrency––for free. We’re a new company that aims to give each individual on the planet a free share of our cryptocurrency. We offer complete transparency to our users, so you don’t have to worry about your privacy. Subscribe to our blog to stay updated.

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