Are ICOs Better than IPOs?
In the space of less than nine years, blockchain technology and cryptocurrencies have managed to cause numerous disruptions across multiple industries. In fact, this is basically the entire premise of the blockchain; to disrupt the mainstream centralized business architecture in favor of a more decentralized and distributed set up. When listing the biggest impacts made in the cryptocurrency world, ICOs will be right up there with the other big developments. But how do they hold up against IPOs? Do they represent a better way for start ups to raise money? ICO and IPO concepts have much in common, but at the same time, they are radically different.
A core part of any cryptocurrency debate is whether a particular cryptocurrency system is better than the old system, especially within the financial niche. Initial Coin Offerings (ICOs) can be thought of as being the blockchain equivalent of Initial Public Offerings (IPOs).
In this article, we’ll try to determine whether ICOs are indeed better than IPOs and give you all the pros and cons.
The regulatory process that guides IPOs is rigid and extensive. There are a numbear of stages that a company must go through before they can roll out an IPO. Financial regulators keep a watchful eye over IPOs and there are a number of regulatory hoops to jump through. This leads to a lot of logistical planning for IPOs, which can take as much as 6 months to complete.
For ICOs, the regulatory framework is loose. Up until July 2017, there hadn’t yet been any serious government effort in trying to develop regulations for ICOs. The SEC in July 2017 issued a ruling that said some tokens were in fact securities and as such, those ICOs were under the purview of securities law.
ICO and IPO Regulation: Verdict
- The loose regulatory framework makes it easier for companies to use an ICO to move their concept to the market and acquire funding.
- The lack of regulatory oversight also means that a number of fraudulent low-value tokens can reach the public.
When investing in a business, an investor has an eye of future dividends. He or she wants to make a profit from the investment. Typically, an investment into an enterprise should give the investor a percentage of the share in the enterprise. Both sides of transaction ought to put up equity which is then exchanged between both parties, subject to a number of terms and conditions.
Investing in an IPO earns an investor a share in the company. By putting up equity in the form of a monetary investment in the company, the investor is given shares which entitles him/her to future dividends from the profits of the company.
For ICOs, the case is quite different. When you invest in an ICO, the company issues you cryptocurrency tokens in exchange for your investment. All future dividends are tied to the performance of that token. But not to the success of the company at large.
ICO and IPO Dividends: Verdict
- IPOs represent a much more equitable transfer of equity. Both sides are putting mutually valuable equities in the form of investor funding and company shares.
- In ICOs, investors are left with potentially worthless coins which may or may not perform in the market and have no shares in the company to show for their investment.
- Combining this with the lack of regulation, pump and dumps ICO schemes have become a common occurrence. Project developers issue worthless coins to investors and pump up the price only to dump them on the market after the ICO. This tanks the value of the coins.
Ease of Participation
Participating in an IPO requires access to a share broker, investment consultant, banks or vendors with connections to a stock exchange complex. Some IPOs list stringent financial and legal documentation that must be provided before one can invest in an IPO. Strict KYC regulations require that banking details and other identifying documentations must be provided by an investor prior to investing in an IPO.
For ICOs, the process is simple and straightforward. All an investor needs are a cryptocurrency wallet to receive the coins and a means to invest in the “cryptocurrency IPO.” Depending on the preference of the startup company, the ICO might accept fiat money or popular cryptocurrencies.
ICO vs IPO Participation: Verdict
- Not only is the process of participating in ICOs a lot simpler than for IPOs. The transfer of tokens after an ICO is almost instantaneous. After the investment confirmation, the coins go to the investors wallet. For IPOs, the transfer of share certificates can take days, even weeks.
- With no need to provide bank statements and identifying documents, more people are going to participate in ICOs than IPOs. This may change with the emergence of strict government regulations in the form of KYC rules for ICOs.
ICO and IPO are both crowdfunding mechanisms with their individual merits and demerits. ICOs have opened the project fundraising market far beyond of banks and venture capitalists. As a result, a number of projects that would ordinarily have not made it to the public space are now in advanced stages of development. When considering which model is better, it is important to realise that many of the highest grossing ICOs like Tezos and Bancor held a private token sale for venture capitalists prior to the main ICO.
ICOs have simplified the crowdfunding process. That simplification, however, has also made it easy for fraudulent campaigns to be unleashed to unsuspecting investors. ICOs can become much better than IPOs with better regulatory measure that ensure the fidelity of the system. Despite this ICO and IPO difference, they provide an opportunity to earn with the constant risk of losing investments.
Let us know what your views and comments are on this debate. At TruDex, we keep you informed and up-to-date with all the latest from the cryptocurrency world. Join our community today and begin to enjoy are premium services.