Initial Coin Offerings ( ICO’s ) : The Next-Gen Method of Fund Raising

Initial Coin Offerings ( ICO’s ) : The Next-Gen Method of Fund Raising

INTRODUCTION

It has recently been raining IPO’s and there has been a steady queue of companies of all shapes and sizes jostling for their two minutes of fame under the sun. In fact, one is seeing many of the tech companies in frenzied activity to go public. All companies have felt that this is the right time to raise funds from the public.

Before we get into the ICO’s, it is important to understand crypto currencies and the technology behind them.

CRYPTO-CURRENCIES AND BLOCKCHAIN

Crypto-currencies are digital or virtual currencies. They are the digital equivalent of real world currencies like the Indian Rupee, US Dollar, etc. just like real world currencies, the owners of crypto-currencies can use their digital currencies to buy goods, services, products, etc. Crypto-currencies are created on the technology called the Blockchain technology.

This Blockchain technology has several unique features with some of the prominent ones being that it is decentralized incorruptible digital ledger of economic transactions that can be programmed to record, not just financial transactions, but anything of value. Further, since this is not stored in a single location but spread across multiple computers, it is next to impossible to manipulate.

There are at present more than 10,000 different crypto-currencies that are out there being traded. Some of the most prominent of them being Bitcoin and ethereum. At present, the total market cap of all the crypto-currencies is in the region of approximately USD 2 trillion.

INITIAL COIN OFFERINGS ( ICO’s)

An initial coin offering is similar in concept to an IPO, both being a process in which companies raise capital. The difference being that while in an IPO, the company issues securities to the investor in an ICO, the investor will receive a digital coin or a token in return for his/her investment which unlike securities need not have any ownership right in the company.

Tokens/Coins issued from an ICO will have a value and is an asset giving investors access to the features/services of a particular project rather than ownership of the company itself.

THE ICO PROCESS

Although there is no prescribed regulation or method for conducting an ICO, certain common practices have emerged which have been enumerated herein below.

1. White Paper
2. Detailed Roadmap
3. Opening Public Blockchain
4. Coin/Token Creation and Sale
5. Listing the Coins/Tokens on a crypto exchange

COMPARISON BETWEEN ICO’s AND IPO’s

1. In an IPO, the investors receive shares for their investment. In an ICO, the investors receive digital coins/tokens but no shares for their investment.
2. While the shares issued in an IPO are legally recognized and carry an intrinsic value, the coins/tokens issued in an ICO neither have any intrinsic value not any legal guarantee.
3. IPO’s are strictly regulated; however, ICO’s are largely unregulated.
4. Companies in India have to have to comply with SEBI’s strict norms and need to have a good track record to be allowed to raise funds through an IPO. However, companies seeking to raise funds through an ICO have no such restrictions.
5. An IPO is an one time sale of shares in the lifetime of the company while an ICO can have multiple rounds of varying durations.
6. Due to the IPO’s being regulated, they have to follow a rigid structure. However, being mostly unregulated. ICO’s do not follow any set structure.
7. The risk factors in an ICO are much higher than those compared to in an IPO. Since ICO’s are mostly unregulated there are more chances of scams and fraudulent ICO’s.
8. There is also the possibility of a far higher return on investment in an ICO then in the case of an IPO.
9. For investing in an ICO, basic knowledge of crypto-currencies and owning of a crypto-wallet is a must. Also familiarity with the ICO mechanism is crucial.
10. In the case of an IPO, audited financial data of the issuer company is available readily in the public domain. However, in the case of an ICO, the investor will have to rely mainly on the white paper issued by ICO.