What is an Initial Coin Offering (ICO)?
As part of our work on halal investment at IFG we are covering cryptocurrency and blockchain technology in a lot of detail. You can read all of the series of our article on this topic here.
In this article, we give an introduction to what Initial Coin Offerings are and provide a brief overview of its pros and cons.
What is an Initial Coin Offering
Initial Coin Offering is a method of financing for companies very similar to an initial public offering.
Companies will usually offer an ICO when they want to raise money for a particular app, service or product. Buying a token will enable the holder to a stake in the company or access to the product or service.
Though ICO’s have less regulatory standards than IPO’s, it is not unheard of for an ICO to be subject to checks. In 2018 the Securities and Exchange Commission intervened in an ICO offered by Telegram.
ICO vs IPO
- Who offers them – IPO’s are typically provided by established companies looking to raise capital whereas ICO’s are offer by emerging or new companies
- Setting up – ICO’s are a lot harder to set up. All that’s needed is to offer a token, write a white paper, and then market it.
- Regulatory standards – IPO’s have a lot of regulatory requirements and checks. So much so that firms will typically employ securities lawyers before going public. On the other hand, ICO’s are relatively new, and there are not as many regulatory boxes that need to be ticked.
- Access – IPO’s will typically require individuals to invest through a broker. ICO investors only need access to the internet and a cryptocurrency wallet.
- Returns – IPO’s have a clear structure when it comes to returns- dividends and selling on a profit. ICO’s are not the same. To understand how returns will work, you would have to look at the company’s white paper and see what buying a token grants you.
How does it work
Companies will display a ‘white paper’ that investors can read before investing. The white paper includes vital information from the company with regards to what the money raised is for, how much is needed, and any other relevant information.
If the amount of funds required has not been successful, then the company will return all investors’ money. Investors are expected to buy in using cryptocurrencies (mainly bitcoin or ether) and so some prior knowledge of cryptocurrencies and wallets is strongly recommended.
Advantages of ICO
- Great for startups as a way to raise capital
- Investments are easy to access and understand
- Potential for high returns – when ICO’s like Antshares offer something genuinely new and exciting to the market there is potential for great returns
- Volatile – can expect rapid price changes in the coin.
- Not always easy to contrast between legitimate and great ICO’s to bad ones from a simple glance at the companies’ white paper.
- Startups offering ICOs may lack accountability and fail to deliver as promised.