Demystifying ICOs – What Are They and Why Are They Important?

According to figures released by several financial watchdogs and news outlets, Initial Coin Offerings (ICOs) raised a total of $1.27 billion in the first half of the year 2017. Even the biggest neophyte in the financial market will consider that figure to be impressive. To illustrate this point further, ICOs only raised only $26 million in 2014. What this means is that in the space of a little under 3 years: ICO capital raising potential has increased by approximately 5000 percent. There’s never been any tradable asset that has experienced such growth as is currently being seen in with cryptocurrencies.

Bitcoin and Ethereum had a significant impact on payment processing and computing technology. ICOs are essentially a new form of crowdfunding that makes these and many other types of projects possible. Startups seem to favor the ICO route rather than implementing the mainstream venture capital path. So much so that ICOs have now become the prominent way to raise capital for new enterprises. Such is the appeal that ICOs in this modern era have raised huge amounts of money in incredibly short time frames. For example, when Brave launched their ICO earlier in the year, it raised $35 million in about 30 seconds.

What is an ICO?

An ICO is a crowd-funding process that involves issuing of digital tokens (cryptocurrencies). The tokens are issued to  investors in exchange for money to establish a startup venture. These investors become early adopters of whatever technology the startup venture supports. This could be almost anything, from a news indexing service to a  music licensing platform. The growth and expansion of the market are causing an increase in innovative blockchain-based applications.

How do ICOs Differ from Conventional Startup Financing?

Just like every other aspect of the cryptocurrency ecosystem, the means by which investor funding is secured differs from the traditional venture capital model. As some experts would say, cryptocurrencies seem to run parallel to the real world. In an IPO (Initial Public Offering) for example, shares of stock in the startup are offered to venture capitalists and banks as a way to invest. Any investor in an IPO knows that he or she is buying into the business and has ownership rights to future dividends.

In the case of ICOs, the situation is a bit different. The money put into a startup venture during an ICO yields coin tokens. The value of these tokens is predicted to increase as the market capitalization of the startup rises.

In mainstream venture financing, entrepreneurs have a lot of hoops to jump through. But the regulatory framework in the ICO scene is almost non-existent. While mainstream financing tends to come in stages, ICOs more or less raise all of their startup funding all at once. Sometimes, in just a few hot minutes! In fact, for this reason, ICOs are termed “one-time financing.”

The ICO Process Summary

There have been marked changes to the ICO landscape since the first ICO was staged by Mastercoin in 2013. This particular ICO raised $500,000 and was a catalyst to the Ethereum, DAO (Decentralized Autonomous Organization), and other ICOs that followed.

The process begins with developing a blockchain based application and working out all the technical and financial aspects. This is then followed by a White Paper, which is the main sales document for the startup venture. At this point, an announcement of token sales begins to go up on the popular blockchain channels to get the buzz going. Investors then have a chance to study the technical and economic merits of the product or service. On the day of the ICO, investors visit the page and can acquire tokens.

The Future of ICOs

Cryptocurrency continues to be a divisive topic among experts with many arguments for and against the trend. While ICOs remain largely unregulated, and even with the possibility of unsavory characters taking advantage of people, there is no stopping the sweeping impact that cryptocurrencies are having on the business scene.

To have some form of a regulatory framework for ICOs, the grey areas in the cryptocurrency scene need to be made crystal clear. Especially in the exact definition of what digital tokens are. Essentially, we have 3 types of “coins”:

  • Cryptocurrencies
  • Utility tokens
  • Tokenized securities.

Most people are familiar with cryptocurrencies like Bitcoin, Litecoin, and Ether. But the blurry lines start to emerge when examining utility tokens vs. tokenized securities.

Some ICOs term their “coins” as utility tokens, as they function within the operating protocols of their blockchain based application. Other experts will contend that these same coins conform to all 4 criteria of the “Howey Test.” Under this test, a transaction is an investment contract if:

  1. It is an investment of money.
  2. There’s an expectation of profits from the investment.
  3. The investment of money is in a common enterprise.
  4. Any profit comes from the efforts of a promoter or third party.

Thus, these utility tokens are actually token securities when bought, sold and exchanged. Having clear-cut regulations that solve this issue will in many ways improve investor confidence in ICOs. Additionally, it will help to demystify the process even more.

In Closing

The cryptocurrency space is an ever-changing landscape with new innovations rolling out every day. The only way to ensure success is to be reliably informed about all the comings and goings in the world of blockchain technology and cryptocurrencies. TruDex is the information hub that keeps you ahead and in the know concerning all things crypto. Join us today and be part of our community.

By Faithful Avan-Nomayo