You must have heard about IPO during your investment journey and there are chances that you might have invested in one. Well, IPO as most of you would know is the process by which a company makes it shares available to the public for the first time. Similarly, when crypto currencies plan to raise funds, they do it through an ICO or Initial Coin Offering.
In simple words, ICO can be regarded as the IPO of crypto currencies, though there are considerable differences between the two fund raising activities. ICO is basically used by startups for raising capital.
ICO are usually successful because it aligns the interests of both the parties i.e., investor and seller. Also, ICO comes with an advantage that it removes all the intermediaries from the process of fund raising and establishes direct connections between the investors and companies.
Types of ICO (Initial Coin Offering)
Initial Coin Offerings can be of two types, Private ICO and Public ICO. Let us now discuss about each one of them in detail.
Private ICO
As the name suggests, a private ICO is only available for selected investors. Therefore, private ICO is available only for limited investors. These selected investors are usually accredited investors from financial institutes and high net-worth individuals. The company has full rights to set a minimum investment amount.
Public ICO
Public ICOs are those which are publicly available for general public. These public offerings are democratized form of investing because there is no limitation, and everyone can be an investor. However, private ICOs are becoming more viable option due to regulatory concerns as compared to public ICOs.
The process of ICO (Initial Coin Offering)
Initial Coin Offering is a very complicated process and requires extensive knowledge of finance, technology and applicable laws. The idea behind initial coin offering process is to leverage the decentralized systems which are used in blockchain technologies for raising capital. These fund-raising activities also align with the interest of various stakeholders.
Let us now discuss about the various steps involved in an ICO process:
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Investment Target identification
This is the first and foremost step involved in an ICO. When a company intends to raise capital from the public, it plans for an ICO. The company also identifies certain targets for raising funds through its campaigns and also develops relevant information and material about the project or company for presenting the same to potential investors.
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Creating Tokens
The second step involved is token creation. Tokens are simply the representation of the utility or asset in the blockchain. These tokens are tradeable and also fungible. Tokens are often confused with crypto currencies, but they are very different These tokens can be considered to be a modification of existing crypto currencies. Also, these tokens also do not provide any stake or ownership in the company unlike stocks, but they do provide a stake in a particular service or a product which is developed by the company.
Blockchain platforms are used for creating tokens. Creating tokens is relatively easy when compared to the creation of a new cryptocurrency because it does not require coding from zero level. Existing blockchain platforms which are running cryptocurrencies are used for creating tokens by modifying the code up to some extent.
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Promotions and Marketing
After the tokens are created, companies start marketing and promotion for attracting potential investors. These promotions are carried out online for maximizing the reach. However, there are certain restrictions on marketing ICOs, and the leading online marketing platforms Facebook and Google don’t allow their promotions.
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Initial Offering
The created tokens are offered to potential investors against a price and this process of offering is structured through several rounds. The capital raised from the ICO is then utilized for developing and launching new services and products. Once the product and services are successfully launched, investors expect an appreciation in the value of their token and sell it for monetary benefits.
Unlike IPOs, public ICOs are very rare. Companies usually proceed for private IPOs due to regulatory requirements. However, before investing in any ICO it is very important to know about your risk bearing capacity. A risk profile analysis can help you in assessing your risk appetite.
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