An Overview of the Initial Coin Offering (ICO)
ICO is a means of raising funds in unregulated ways for different cryptocurrency companies. It’s something startups use to bypass the rigorous and regulated capital raising process required by banks and venture capitalists. In such a campaign, a certain percentage of the cryptocurrency is sold to project backers very soon for other cryptocurrencies or legal tender.
how is it done
When a company wants to raise money using the initial coin offering, there should be a plan on white paper stating the details of the project. You should describe what the project is about, what the project needs, what you intend to accomplish by completing it. You should also indicate the money that will be needed to start the whole company and how long the pioneers will stay.
The plan also has to mention the type of currency accepted and how long you intend to run the campaign for. During said campaign, the supporters and enthusiasts of the initiative will buy the cryptocurrencies using virtual currency or fiat currency. The coins are called tokens and are very similar to company shares that are sold to investors during IPOs. If the minimum required funds are not reached, the money is refunded and the entire ICO is considered unsuccessful. When the requirements are met within a set time frame, the cash can be used to start the scheme or even complete it if it was still in progress.
Investors who are involved in the project from the very beginning are mainly motivated to buy cryptocurrencies in the hope that the plan will be successful and after the launch they will get more value from it. There have been very successful projects of this type in different economies and that is the main thing that motivates investors.
similarities
ICOs can be compared to crowdfunding and IPOs. Like IPOs, a new company must sell a stake to raise funds to help the company’s operations. The only difference is the fact that IPOs deal with investors while ICOs work closely with supporters who are highly interested in new projects, such as the crowdfunding event.
However, ICOs are different from crowdfunding in that ICO backers are generally motivated by the fact that they can get a great return on investment. The funds raised through crowdfunding are basically donations. It is for this reason that ICOs are called crowd sales.
There have been many successful transactions so far. ICOs are an innovative tool in our digital age. However, it is important for investors to take precautions as there are some campaigns that can turn out to be fraudulent. This is due to the fact that they are very loosely regulated. The financial authorities are not involved in this and if you lose funds through such initiatives, it is difficult to follow up for compensation.
In this sense, there are some regions that do not allow the use of ICOs at all. It is important to buy such currency only from trusted sources to be safe.