What is an ICO? How it Started Vs. How it's Going

Blockchain technology and cryptocurrency continue to revolutionize and transform various sectors of the economy, including finance, healthcare, and education. So, it's not just in finance that we find blockchain applications. Key to these innovations and creations is the aspect of fundraising. In the crypto industry, individuals and companies can choose to fundraise through an initial coin offering (ICO) or the more recent security token offering (STO). In this article, we look at the ICO method.

What is an Initial Coin Offering (ICO)?

An ICO is a crowdfunding method that allows blockchain-based projects to fundraise for the purpose of financing the initial development phase of the project. It was also popularized as token sales, which means a company or group of developers could reach any interested party with an ICO campaign.

A campaign simply relates to the offering of utility tokens to investors who purchase them at a given price and can use these tokens to participate in the project in the future.

ICOs are the cryptocurrency equivalent of Initial Public Offerings (IPOs).

What does a company need to do an ICO?

Key information that a company should provide when it needs to fund-raise using an ICO;

• A whitepaper which is a document detailing the nature of the project,
• The amount of money needed at the end of the project,
• The number of tokens the startup will hold back,
• The acceptable trading currencies; digital currencies only or even fiat currency,
• The length of the ICO

Once a company has these in place and has outlined its investment goals clearly, including setting up the necessary safety measures, it needs to do the following:

Create tokens

In the blockchain industry, investment is exchanged or rewarded with a coin or a token. The company, therefore, needs to create coins/tokens which will represent the owner's stake in the companies' product.

Advertise the ICO

An ICO campaign is an integral part of the fundraising and a company needs to ensure it reaches potential investors. This can be done via various platforms, though the most popular (Facebook, Twitter, and Google) banned ICO ads in 2018. But still, companies can access several online platforms to run the campaigns, including letting potential investors know acceptable payment methods and how to participate.

Issue tokens investors

The token sale involves allocating investors tokens proportional to their investment, which is how the company raises the capital it needs to continue the project.

This happens within a set time- the ICO period- and if the company gets its target, then the ICO is successful. If for a reason that isn't the case, then the funds raised may be returned to the investors. In such a situation the ICO is labeled as unsuccessful.

What should an ICO investor consider before investing?

As an investor, you need to check out the following before putting your worthwhile money into an ICO.

You need to know about the team and any prominent figures associated with the project. Such information will help you establish if they are people conversant and legit in the industry.

• Establish the purpose or goal of the token - You need to know why the main purpose for the ICO, whether it's to launch a new product or coins, should be clearly stated.
• How the ICO will use the capital raised - Don't shy from questioning how the funds raised would Ibe spent as this determines the legitimacy as well as the end goal of an ICO.
• The overall goal of the ICO - A strategically prepared plan shows the objectives of the project, past achievements that can convince you if the ICO is legit.
• The terms of the ICO - Be keen to note the terms and conditions of the ICO including the acceptable currencies, information available as well as how long it will run.

What was the first ICO (Token sale)?

The Mastercoin project, which pioneered in 2013, was the first token sale. The token which was exchanged for Bitcoin garnered over $500,000 bitcoin, which was a great success then. The campaign was for a peer-to-peer crypto exchange platform and it inspired so many crowdfunding projects later.

Ethereum has become one of the most successful ICO projects and in 2017, the ICO boom saw thousands of projects emerge using Ethereum's platform.

EOS and Telegram held the two largest ICOs in history at $4 billion and $17 billion respectively.

Here it's worth noting that although unregulated, the ICO industry still has to adhere to certain regulatory guidelines. That is why the US SEC sued Telegram and successfully halted its Telegram Open Network (TON) project.

ICO Regulation

The explosion of ICO projects has seen regulatory authorities scramble to rein in what could be termed as illegal offerings.

The U.S Securities and Exchange Commission which oversees U.S financial markets still regulates ICOs when the ICO sells to American investors. As noted above, the SEC is keen on ensuring companies adhere to guidelines if the ICO is offering a security token.

According to the SEC, a majority of ICOs are security offerings and must therefore register it with the SEC or file for exemption under the Security Act of 1933.

That has explained the growth in STOs as ICO popularity wanes. Other companies have opted to leave out U.S investors.

Different countries have adopted their own ways to monitor ICOs, including some that have imposed a total ban like in China. The U.S and the EU countries have begun structuring regulatory frameworks to oversee ICOs.

Conclusion

ICOs have been a popular means of fundraising for crypto projects, and remain integral. However, with tightening regulations, the security token offering (STO) is gaining more traction and may become the new craze in town already. If there is an ICO out there you wish to participate in, be keen to put the above points into consideration. There is no sure way to ascertain which ICO is safe. As an investor, you need to research the legitimacy of an ICO you wish to invest in.