Initial Coin Offering (ICO)

Updated on March 11, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Initial Coin Offering (ICO)?

Initial Coin Offering (ICO) is a blockchain-driven fund-raising process. Through ICO, a company sells crypto coins or tokens to investors in exchange for legal money or other cryptocurrencies. It is one of the most effective ways for organizations to raise capital and finance their new projects and other initiatives.

Initial coin offering (ICO)

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An ICO process is similar to the traditional Initial Public Offering (IPO) concept, whereby companies sell their shares publicly, making investors pay for the securities. The investments raise company capital using which the projects are funded.  However, unlike the IPO, ICO investors do not acquire ownership through investing in the company.

Key Takeaways

  • Initial Coin Offering (ICO) is a blockchain-based financial process for raising capital to finance new project ideas.
  • It involves selling coins or tokens to investors in return for digital payments.
  • Investors benefit from tokens as it provides access to the company’s product or service in advance.
  • To start an ICO, a company must release a whitepaper outlining the details related to the offering.
  • Though highly profitable, ICOs come with high risk as they are mostly unregulated.

Initial Coin Offering Explained

The Initial Coin Offering (ICO) is the process through which companies or entrepreneurs can obtain funds by issuing cryptocurrencies to finance their new projects. ICO was introduced in 2013 by J.R. Willett, the founder of Mastercoin (now Omni).

Using ICO, companies sell tokens created using the blockchain technology to investors in return for legal currencies or other cryptocurrencies like Bitcoin. The proceeds from the ICO are thus used to launch their new projects. The tokens issued to investors become a functional currency unit when the development of the product or service as part of the new project is complete.

When a company is ready to offer an ICO, it announces the initial coin offering list, the date of launch, rules to follow, and specifics well in advance in a whitepaper. This helps investors to decide and be ready to buy the tokens in exchange for cryptocurrencies on the said date.

As soon as the investor buys the ICO, the money paid goes to a specific compatible crypto wallet address, and investors receive the tokens purchased in return. The token is either connected with a particular project of a company or constitutes its share. It can also be the shares in proceeds yet to be realized or of no recognizable value at all.

ICOs can be highly profitable if everything falls in place. However, they might also lead investors to trouble at times. It remains unregulated in most cases. As a result, there is no rule to stop companies from running away with investors’ money.

Thus, investors must search for an initial coin offering platform regulated by some authentic authorities. Once they feel confident about the authenticity of the involved cryptocurrency dealings, they can decide whether to invest or not.

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Initial Coin Offering (ICO) Types

An ICO regulator may either classify the token offering as an underlying service of a company or a security to trade. If the token is offered as a service, an ICO requires issuing a whitepaper detailing the nature of the business, its structure, purpose, objectives, etc.

Alternatively, if issued as a security, an ICO needs to undergo proper registration and meet other regulatory requirements. Therefore, some ICOs are registered with and regulated by the U.S. Securities and Exchange Commission (SEC).

ICO is classified into two types – Private and Public.

  1. A private ICO can only have a small number of investors, mostly accredited ones. The accredited investors can either be a financial institution as a whole or a high net-worth individual. They can participate in the ICOs with the company offering them a set price.
  2. A public ICO, on the other hand, refers to crowdfunding that is open to all. Anyone around can be an investor. However, given the safety and regulatory concerns, private ICOs are gaining more momentum than their public counterparts.

Example

While Ethereum (CRYPTO: ETH) and Solana (CRYPTO: SOL) are two of the most popular and profitable ICOs in the industry, the one that has been gaining eyeballs recently and is on the watchlist in 2022 is NAGA (CRYPTO: NGC). NAGA is a German fintech company offering an investment app with a social network for traders. It allows traders to copy and follow popular traders and, as a result, learn and grow. 

The NGC token was launched in December 2017 in partnership with the NAGA Group post raising funds worth $50 million as part of an ICO. The cryptocurrency is valued at a market cap of $103 million, with the price of one NGC token reaching $1.31 in 2022, which is way more than $0.0286 as recorded in January 2020. 

ICO vs IPO

As already stated above, ICO and IPO are equivalent terms with similar nature but different offerings and exchange options. 

ParticularsICOIPO
Full FormInitial Coin OfferingInitial Public Offering
PurposeRaise funds through cryptocurrenciesRaise capital by selling securities
PlatformBlockchain platformPrimary stock markets
OffersTokens or coins in exchange for other cryptocurrencies or legal currenciesCompany shares in exchange for payment
RegulationMostly unregulatedSEC regulated
Risk InvolvedHigh as no finished product to show for guaranteeLow risk as investors have finished products or projects to assess before deciding whether to invest
StakeTokens provide access to the company’s new product or serviceSecurities offer ownership in the company

Frequently Asked Questions (FAQs) 

What is an Initial Coin Offering (ICO)?

ICO is a means of acquiring funds for new projects using cryptocurrencies. Companies sell tokens developed on blockchain platforms to investors in return for other cryptocurrencies. These tokens offer investors utility in the company’s yet-to-be-created product or service or the blockchain platform. An ICO is similar to the traditional Initial Public Offering (IPO) concept, whereby companies sell their shares publicly, making investors pay for the securities.

Are Initial Coin Offerings (ICO) legal?

The ICO remains unregulated in most cases. As a result, there is no rule to stop companies from running away with all investors’ money. However, some ICOs are registered with and regulated by the U.S. Securities and Exchange Commission (SEC).

What is the ICO process?

Under the Initial Coin Offering (ICO), the company looking to raise capital for a new project announces the initial coin offering list and other details related to the buying process. Interested investors invest in the project in exchange for crypto financial assets or tokens. Investors must open a special account on the blockchain platform to buy the tokens. After that, they can transfer the tokens to any account on the blockchain platform.

This has been a Guide to what is Initial Coin Offering (ICO). We explain ICO using cryptocurrency along with its list, platform, examples and its difference from IPO. You can learn more from the following articles –

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