Initial Coin Offerings (ICOs) and How They Work

Posted on: December 3, 2018

An ICO is an abbreviation meaning Initial Coin Offering, it’s the cryptocurrency equivalent of a traditional Initial Public Offering, also known as an IPO. In an IPO, investors exchange money for equity in a public company, so ICOs are similar in that they’re used to raise funds to develop new cryptocurrency.

Initial Coin Offerings are essentially a crowdfunding technique to help emerging cryptocurrency take off. ICO fundraising allows interested investors the opportunity to trade-in coins from existing cryptocurrencies for coins on their new platform. This creates a lot of value through the existing user base.

ICO Legalities

One of the most contrasted and controversial differences between IPOs and ICOs are regulations. IPOs are tightly regulated by the Securities and Exchange Commission (the SEC), and ICOs are currently unregulated with no oversight by the SEC, making them a prime target for fraud.

While ICOs currently operate in a gray zone, in the future they most likely will be regulated. This could mean some financial and legal risks for investors. To top it all off, the cost and effort to be in compliance with SEC regulation could reduce the advantages of ICOs compared with traditional means of funding.

Advantages of ICOs

Initial Coin Offerings do provide a platform for startups to quickly raise money faster than conventional fundraising mechanisms. The Ethereum ICO launch in 2014 is a case in point. The launch of Ethereum cryptocurrency turned out to be the most successful ICO venture to date since Ethereum was initially offered at $0.35-$0.40 at launch, and is priced today, December 3rd, 2018 at $107.21.