What is an Initial Coin Offering (ICO)?

Published by Thomas Herold in Banking, Corporate Finance, Investments, Trading

'Initial Coin Offering (ICO)' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

An Initial Coin Offering refers to a non-regulated process in which the funds for new crypto-currency projects become raised. This is also popularly known by its acronym of ICO. These ICOs allow for entrepreneurs to sidestep the heavily regulated process of raising capital through more traditional means involving banks, venture capital, angel investors, or IPOs initial public offerings on stock exchanges.

With any ICO offer campaign, at least some of the crypto-currency will be sold off to those backers of the venture who become involved early. They receive this in compensation for providing traditional currency or alternative currency investment from the likes of Bitcoin. These ICOs are also known as IPCOs, or Initial Public Coin Offerings sometimes.

The process for engaging in an Initial Coin Offering is straightforward and relatively easy to do. The startup outfit begins by producing and releasing a whitepaper-based plan that reveals all of the key details on the venture. These include the needs this operation will meet when it is up and running, what percentage of the new virtual currency project pioneers will keep, what kinds of funding is allowed, the amount of cash required to make the venture a success, and what time duration the campaign will run.

In this campaign, the investors and supports of the new initiative will purchase part of the alternative coins of the new venture with real or virtual money. Such alt coins will be called tokens. They function in much the same way as do shares of stock which corporations sell their investors during an IPO initial public offering.

In cases where the funds raised are not sufficient to carry out the project requirements as set out by the firm in the white paper plan, invested sums will be given back to the investors as the ICO becomes a failure. Yet in those many cases where the funding objective are attained within the set out duration, then the money will be utilized to fund the new enterprise (or to finish it in other cases).

Naturally the upfront investors have their own motivation in purchasing such crypto-coins in the project. This is because they believe that the operation will be a success following launch. This would lead to a potentially massive gain in the value of their tokens.

One highly successful ICO proved to be the platform for the introduction of smart contracts to the world, known as Ethereum. Its coin tokens are called Ether. The Ethereum project came out in 2014. The ICO garnered $18 million worth of Bitcoins for the project’s completion. This meant that the Ether tokens cost forty cents apiece. Following the live launch of Ethereum in 2015 and growing success in 2016, Ether roared higher to more than $14. In 2017, it has even topped $400 each at one point. Early investors who held to $400 realized gains of an eye-watering over 1,000 percent in less than five years.

It is true that many ICO events go off successfully. These Initial Coin Offerings are in fact highly disruptive and innovative means of fundraising. Yet they are not a serious rival to traditional stocks by a long shot. Many ICO campaigns have been deemed to be fraud. Without the imperative regulation provided by the SEC Securities Exchange Commission, their volume is likely to remain a tiny fraction of that done in IPOs on traditional exchanges for at least the foreseeable future.

ICOs have suffered from official national opposition which has hindered them as well. The People’s Bank of China fully banned all ICOs in September of 2017. They declared them to be financially unstable and disruptive to an orderly economy. Banks were forbidden to provide any services having anything to do with ICOs. At the same time, these new tokens were no longer allowed to be utilized as a currency on Chinese markets. It caused the Bitcoin and Ether enthusiasts to realize that crypto-currency regulation is in the future cards. This temporarily crushed the prices of both main alternative currencies as investors realized what a serious setback it represents.

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The term 'Initial Coin Offering (ICO)' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.