Thriving businesses need funds to expand into new territories, grow their team or pay existing debt. They can approach an investor, if they’re a small or medium organization, or go public with an Initial Public Offer (IPO) if the company is big enough. That’s the standard way through which companies can secure funds.
However, with the rapid growth in technology, alternative investment methods have also come up, giving companies yet another route to access capital. One of them is Initial Coin Offerings (ICO). In this article, we’ll be comparing it with IPOs, and see which one makes more sense for investors.
What is an IPO?
An IPO is a company’s introduction of the stock exchanges. Through IPOs, companies give random investors the opportunity to earn a share in the company, in exchange for their funds. Companies use these funds for their business purpose, while the investors own shares in the company, which they buy, sell or hold depending on how the share is doing.
What is an ICO?
ICO is a relatively new way in which companies can fund their business requirement. Investors who are interested in an ICO give their money and, in return, get some kind of cryptocurrency token that can be used for accessing a product or service offered by the company they’re investing in.
What’s the difference between the two?
Although they look the same, IPOs and ICOs are different from each other in various ways. Some of them include:
|Differentiator||Initial Public Offering (IPO)||Initial Coin Offering (ICO)|
|Stage||IPOs typically arrive after the company has been in the business for a few years. The companies that pick the IPO route already have a working business model, and also have proven products and services on offer.||ICOs occur at a very nascent stage in a company’s business. Usually, it is the first round of funding that a business needs to get its ideas on the road.|
|Regulation||IPOs are tremendously regulated. They’re monitored by the Securities and Exchange Board of India (SEBI), which means only those companies that have a worthwhile business can earn funds through an IPO.||ICOs, like the wider cryptocurrency industry, are unregulated. There’s no authority to safeguard investors’ money.|
|Listing||The shares that investors receive through an IPO are legit. They can be traded on the stock exchanges in real-time, and bought and sold according to the investors’ will.||The tokens that investors get through an ICO are not always listed on the exchanges. This means that there is a possibility that the token may never list on the exchange, and that renders investors’ money redundant.|
|Fees involved||Since IPOs involved a lot of paperwork, there are a number of beneficiaries involved. This percentage of the investors’ money goes into paying these beneficiaries as well.||ICOs cut the need for the middleman. Only the company and the investors are involved, which makes it far more efficient and profitable for both parties.|
|Method of investing||Only registered investors, who have completed their KYC process and own a Demat account, can participate in an IPO.||Investing in ICOs doesn’t require anything. All you need is access to the Internet.|
IPOs seem to be more investment opportunities than ICOs on the surface. IPOs are highly regulated, and businesses must comply with many regulations. Transparency and disclosure of information are key components of the IPO process, which aids investors in making informed investment decisions.
However, this does not imply that ICOs are insecure. Sure, there are no rules governing ICOs, and the venture could be a huge success or a complete disaster.
That being said, even the most stable companies that issue IPOs can go bankrupt, wiping out your investment. Nobody can predict which investments will pay off and which will not. Therefore, before making an investment decision, a good amount of caution is necessary.