An initial coin offering (ICO) or initial currency offering is a type of funding using cryptocurrencies. It is often a form of crowdfunding, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of cryptocurrency is sold in the form of “tokens” (“coins”) to speculators or investors, in exchange for legal tender or other (generally established and more stable) cryptocurrencies such as Bitcoin or Ether. The tokens are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project successfully launches
KEY TAKEAWAYS</span></b>
- Initial Coin Offerings (ICOs) are a popular fundraising method used primarily by startups wishing to offer products and services, usually related to the cryptocurrency and blockchain space.
- ICOs are similar to stocks, but they sometimes have utility for a software service or product offered.
- Some ICOs have yielded massive returns for investors. Numerous others have turned out to be fraud or have failed or performed poorly.
- To participate in an ICO, you will usually need to purchase a digital currency first and have a basic understanding of how to use cryptocurrency wallets and exchanges.
- ICOs are, for the most part, completely unregulated, so investors must exercise a high degree of caution and diligence when researching and investing in ICOs.
How an Initial Coin Offering (ICO) Works
When a cryptocurrency startup wants to raise money through ICO, it usually creates a whitepaper that outlines what the project is about, the need the project will fulfill upon completion, how much money is needed, how many of the virtual tokens the founders will keep, what type of money will be accepted, and how long the ICO campaign will run for.
During the ICO campaign, enthusiasts and supporters of the project buy some of the project’s tokens with fiat or digital currency. These coins are referred to the buyers as tokens and are similar to shares of a company sold to investors during an IPO.
If the money raised does not meet the minimum funds required by the firm, the money may be returned to the backers; at this point, the ICO would be deemed unsuccessful. If the funding requirements are met within the specified timeframe, the money raised is used to pursue the goals of the project.
Special Considerations
Investors looking to buy into ICOs should first familiarize themselves with the cryptocurrency space more broadly. In the case of most ICOs, investors must purchase tokens with pre-existing cryptocurrencies. This means that an ICO investor will need to already have a cryptocurrency wallet set up for a currency like bitcoin or ethereum, as well as having a wallet capable of holding whichever token or currency they want to purchase.
How are ICOs regulated?
ICOs are largely unregulated. In the United States, there aren’t any regulations that apply specifically to ICOs. However, if an ICO fits the classification of a securities offering, then it falls under the SEC’s jurisdiction and is regulated by federal securities laws.
Some countries have taken a strict stance and banned ICOs entirely. Countries that have banned ICOs include China, Nepal, Bangladesh, Macedonia, Bolivia, and Ecuador.