It is easy to understand an Initial Coin Offering (ICO) if you’re familiar with the Initial Public Offering (IPO). An IPO is a fundraising activity in which a private limited company becomes public. They raise capital through investors in exchange for some shares in the company. An ICO is fundamentally similar, although it has some differences when compared to IPOs.
What is an Initial Coin Offering (ICO)?
An ICO is a process through which a startup raises cryptocurrencies from investors. It uses blockchain technology to create tokens. Investors looking to invest acquire those tokens in exchange for funds. The exchange is done on the decentralized blockchain system, which means there’s no need for both parties to file papers with regulators.
There’s, in fact, no need to seek approval or approach any other organization whatsoever. The startup and the investor can carry out the transaction on the blockchain system for free. So an ICO saves money too.
How do ICOs work?
While the fundamental way in which ICOs work is quite straightforward, it involves a lot of work at both the investor’s and startup’s end. Here are the key steps of the whole process.
- Startup identifies targets
Once the startup decides to raise capital through an ICO, it starts identifying potential targets to fulfill its goals. After it has identified these targets, it then creates the relevant documents and presentations as part of its pitch. A good pitch can make or break the fundraising request.
- Token creation
Startups engaging in an ICO do not give out equity stakes like in IPOs. Instead, they create something called tokens and exchange that for cash from investors. Tokens are tradable modifications of cryptocurrencies that provide their owners some stake in a product or service owned by a company. So when a startup decides to approach an investor, it creates tokens to show that the investor will earn value from investing in the startup.
- Raising awareness about the ICO
Advertising is important, even when we’re talking about ICOs. Immediately after starting the ICO process, the startup promotes it to attract investors. There are many different platforms that startups can use to raise awareness about their ICO.
- Offering tokens for money
After the tokens are created, they are shared with the relevant investor in exchange for cash. The process is completed on the blockchain system and doesn’t need to be approved by any regulator. The startup can use the funds raised to improve their products, expand their territory, or grow their team. The investor, meanwhile, can use the token to access the product or service offered by the company.
Types of ICOs:
ICOs are broadly of two types:
- Private ICOs
Private ICOs are exclusive. Not every investor can invest in this type of ICO. Only accredited investors or those having seriously high net worth are allowed to participate in private ICOs.
- Public ICOs
This is a more inclusive type of ICO. Investors of all types and net worth can participate in public ICOs. Every investor gets tokens proportionate to his/her invested amount. They can use it to access a product or service offered by the company, or wait until its value increases.