It is in the little time that Cryptocurrencies have been in existence, and many new ideas and practices have been brought into our knowledge, such as decentralization, coins, tokens, altcoins, etc. Companies whose underlying technology includes an irreversible distributed ledger for decentralized goods and services may avail of the ICO crowdfunding strategy. In the space of cryptocurrency, some other processes are IPOs. An investor gets shares or stocks instead of money invested during an IPO. Starting from the Initial Public Offering is a well-defined and documented process through which a private company can grow and go public.
What is ICO and How Does it Work?
An ICO is a means of raising capital predominately utilized by startups and businesses involved in the blockchain and cryptocurrency sectors. This allows organizations to raise money by giving investors digital tokens or coins in exchange. A typical ICO will involve the following steps:
- Whitepaper and Announcement: The project team or company publishes a whitepaper, accompanied by the announcement of the ICO. This paper describes the project’s mission, technology, and intended use of finances.
- Pre-ICO Stage: Some businesses hold pre-ICO stages to raise preliminary funding and media attention. During this time, tokens are normally given at a discount to early investors.
- Token Sale: The main ICO event involves an investors-only token sale. The sale may last for some days or even weeks.
- Token Sale: The main ICO event involves a token sale, in which investors participate at their own will. It may run for some days or a few weeks. The participation involves sending money to an address provided by the ICO organizers.
- Token Distribution: When the ICO reaches its end, tokens get transferred to investors’ wallets. These same tokens can then be exchanged on a cryptocurrency exchange if listed.
- Post-ICO Development: As per the plan, the raised money is used in the development of the project. In case successful projects fulfill their commitment and hit significant benchmarks, tokens are often valued.
Benefits of ICO
ICOs have grown in popularity in the digital age as a very futuristic fundraising technique, more so in the sectors of cryptocurrency and blockchain. The following are the primary advantages of ICOs:
- Global Access to the Investor Pool
Initial Coin Offerings give firms, as well as nascent projects, access to a global investor pool. This may become quicker and easier than some more traditional ways, such as bank loans or venture capital, for raising an initial coin offering.
2. Communities Building and People Engagement
Initial Community Involvement: ICOs help create a large user and support community from the very start. Token holders could obtain access rights to services, profit-sharing, and other governance rights like voting within respective platforms.
3. Trading and Liquidity
Shortly after the ICO is concluded, often it allows one to trade ICO on cryptocurrency markets. The prices of tokens fluctuate based on market demand and the performance of the project, thereby creating opportunities for investors.
Risks Associated with ICO
Here are the risks associated with ICO:
Technical Risks
ICO depend on smart contracts to automate a range of processes, such as token issuance and fund distribution. Technical failures, delays, or scalability issues with the project’s underlying technology may impede the project’s progress and impact the token’s value.
Security Risks
ICOs are vulnerable to cyberattacks, which can jeopardize the project’s security and result in data breaches and losses. Investors are required to store their tokens in secure wallets; vulnerabilities in wallet software or inadequate security procedures may cause tokens to be lost.
Risks of the Project
Quite a large portion of ICOs are projects based on completely new, untested business ideas. Probably, the project is not going to be adopted by the market, won’t make money, or won’t be relevant with advancing technology.
Scams and Frauds
There have been many fraudulent scams in the ICO space where some scoundrels start fake companies with no intention of providing a good or service. Frequently, due to the anonymity of the blockchain and the global nature of initial coin offerings, it has been impossible to prosecute scammers.
How Does an IPO Work?
An initial public offering (IPO) is a painful process a corporation has to go through for issuing stock to the public. Choosing underwriters, doing due diligence, getting regulatory clearance, marketing the offering, deciding on the IPO pricing, and listing the stocks. Following is how an IPO works in detail:
Preparation and Planning
It is through underwriters that the IPO will be largely priced, shares will be bought from the company, and the bought shares resold to the public. To ensure that all business information and financial statements are accurate due diligence is conducted by the company and its underwriters. At this stage, key document preparation is performed
Regulatory Acceptance
A registration statement has to be filed with the Securities and Exchange Commission by the company in the US. This document contains a more detailed overview of the business model, risks, management, and financial performance of the company. The company may be asked to respond to the comments made by the SEC and must make all necessary amendments.
Promotion and Roadshow
The firm and its underwriters market the business to potential investors in various locations. The objective of this marketing campaign is to elicit interest and demand for the shares. Underwriters gather non-binding indications of interest from institutional investors, enabling the company to determine the IPO price.
Cost and Distribution
The IPO price is finally decided by the underwriters and the firm, based on the response of the investors and market conditions. This price is finalized just before the allotment of shares. Institutional investors with their enormous potential investment, get a good chunk of the shares — provided by mutual funds and pension funds, among others.
Going Public
An initial public offering day marks the opening of trading in the company’s shares on a public stock market. The performance of the shares on the first trading day can differ significantly based on the interest shown by investors and the general mood in the market.
Benefits of IPO
There are many advantages associated with this method, both in the short and long run. Some of the main primary advantages of initial public offerings include:
Acquiring Capital
One of the primary advantages of an IPO is raising large sums of money from the sale of shares to members of the public. This cash infusion can be used for several other things, Publicly held companies also attract a variety of investors — mutual funds, institutional investors, and individual investors.
Comparing and Valuing the Market
An IPO gives a market-determined company valuation, which helps compare with industry rivals and set up performance benchmarks. Stock-based remuneration to management and staff helps align their goals with the shareholders’ interests and motivates them towards more shareholder value.
Liquidity to Equity Holders
An IPO provides liquidity to current stockholders. These householders can sell their shares on the open market to recover the money they originally put into the investment. Publicly traded shares can be used in employee benefit programs in the form of equity grants or stock options to attract and retain quality people.
Risks Associated with IPO
Along with all the benefits it offers, here are some risks associated with IPO:
Regulation and Compliance
This could be very expensive and time-consuming. Legal issues, such as shareholder class action suits and regulatory enforcement actions, are much more likely to affect a publicly listed company.
Market Risks
The stock market is very volatile. This could affect the market valuation of the company; even the stock price can hardly remain stable with this much volatility. There is a risk that the stock of the company would do poorly after the IPO.
Dilution of Ownership
The issuance of new shares to the public dilutes the ownership stake of existing shareholders. Public ownership also comes with possibilities of hostile takeovers or high influence from institutional investors.
Increased Disclosure and Transparency
Although transparency is good in itself, it opens up even more exposure to the business and gives an added edge to the competition. Requirements of transparency can mean lost privacy regarding business strategies and activities.
Difference Between ICO and IPO
These are some of the major differences between an ICO and an IPO:
Stage
ICOs happen very early in the life of a company or project. For an unproven concept or idea to be developed, it usually requires working capital before it has any functioning products or services. An IPO happens later on in a business’s life.
Regulation
Initial coin offerings are closely regulated by government regulatory bodies such as the Securities and Exchange Commission. Most ICOs are self-regulated via blockchain smart contracts. It is, therefore, often safer to invest in IPOs than ICOs.
Listing Requirements
Even if the cryptocurrency backing it is not traded on any exchange, an initial coin offering (ICO) can take place. IPO shares must be listed on an exchange before its offering.
Distribution
Some ICOs distribute their cryptocurrency token inappropriately and enable the manipulation of the market. IPOs distribute their shares using a variety of effective strategies that are invariably cleared by stock regulatory bodies.
Conclusion
ICOs democratize access to capital with the help of blockchain technology; they are innovative and accessible. In contrast, IPOs provide established regulatory oversight and tremendous access to capital but are generally costly and highly regulated. For a business or an investor to make the right decision on the pathway to take, differences such as these should be understood. Both ICOs and IPOs have their own set of challenges that need to be treated very cautiously. While high costs, regulatory hurdles, and market performance pressure dog IPOs, an Initial Coin Offering comes with problems such as regulatory scrutiny, security vulnerabilities, and market volatility.
