An Initial Coin Offering, at its core, is just like an Initial Public Offering with two differences:
- there is no legal regulation,
- investors do not get an ownership stake to the company.
ICOs essentially are fundraisers that crypto companies are using to raise funds. They do this by selling their underlying cryptocurrencies for fiat currencies or the two significant cryptocurrencies: Bitcoin and Ethereum. The money raised is used to get the company off the ground and run its operations.
How Do Initial Coin Offerings Work?
Consider a new startup with a promising idea for a cryptocurrency solution but lacking the capital needed to run. The company can raise money through an ICO by selling some of its cryptocurrencies. However, there is a set procedure on how to do this.
Running an ICO begins with publishing a white paper. The white paper is a document that explains your new company’s short-term and long-term plans in detail. It is designed to ensure that interested investors are fully informed about what they are in for before investing.
The next step is announcing and running the ICO. ICOs are scheduled to run for several days, sometimes longer than a week. As mentioned earlier, the money is raised by issuing the company’s cryptocurrencies for fiat currencies, BTC, or ETH. The new company can then begin its operations if the ICO is successful.
The concept of an ICO may sound simple, but it is riddled with numerous legal complications that have caught the eye of major regulators including the SEC.
The main complication in ICOs is lack of trust. ICOs are not regulated by the government, so investors are not guaranteed security for their money. What’s more, investors do not get a stake in the company. To this end, the people behind the ICO can abscond without any severe consequences. Additionally, the fact that most ICOs are run by startups means that investors are essentially investing in promises.
However, things have been changing since 2017 when the U.S. Securities Exchange Commission (SEC) decided to get involved with ICOs. The SEC released an announcement stating that it would regard specific tokens sold in ICOs are securities and treat them as such. Part of the statement read: “…regardless of whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.”
Interestingly, not all tokens are considered security under SEC standards. For instance, Ethereum is considered more of a currency than a security. Nevertheless, most tokens still fall under the category of securities. To this end, companies seeking to run their ICOs will have to consider this factor.
The Biggest and Most Successful ICOs
Hundreds of ICOs have been held since 2013 when the first Initial Coin Offering was launched. Many have gone unnoticed, but some have managed to raise a lot of money in record time – for instance, the Basic Attention Token raised about $35 million in just 30 seconds. What’s more, many ICOs have not delivered on all of their promises (so far), but some have gone on to achieve their goals. Following are brief insights into 3 of the biggest ICOs as well as 3 of the most successful.
The Biggest ICOs
Petro – USD 5 Billion: Petro has raised the highest amount so far but under controversial circumstances. For starters, the cryptocurrency was developed by the Venezuelan government in a bid to get around existing economic sanctions. Secondly, there are reports that the crypto was launched with the help of the Russian government. Finally, the cryptocurrency has been outlawed by the U.S. as well as two Venezuelan law-making groups.
EOS – USD 2.5 Billion: EOS is a Chinese-based cryptocurrency that plans to create an advanced Blockchain platform on which decentralized applications can be developed. It has made significant promises to get investors’ confidence, including the level of security associated with Bitcoin and Ethereum’s computing power.
Telegram – USD 1.7 Billion: Telegram, a popular messaging app, also arrived through an Initial Coin Offering. Interestingly, both ICOs were private and only open to accredited investors in the U.S. The investors were classified into two categories: outsiders (required to invest at least USD 20 million) and friends (required to invest at least USD 500,000).
The Most Successful Initial Coin Offerings
A majority of ICOs have not lived up to their promises, but some have done this and more. They include:
NEO: NEO has been dubbed “China’s Ethereum” as it heavily utilizes smart contracts and decentralized commerce. Its tokens sold for 3 cents during its ICO and rose to an all-time high of about USD 180. Its ICO was also massive at the time. However, it should be noted that this company receives considerable support from the Chinese government.
Ethereum: Ethereum is the second-largest cryptocurrency by market capitalization. There are also speculations that it may become more significant than Bitcoin. Ethereum tokens sold for $0.31 during its ICO and rose to an all-time high of about USD 700.
Spectrecoin: Spectrecoin comes in a distant third. Its success does not come close to NEO’s or Ethereum’s, but it is better than most. The figures are also not significant, but the difference is. One token sold for USD 0.001 during its ICO in 2016 and prices have since risen to USD 0.60.