Following the infographic about What is ICO Crowdfunding?, today, we will share how ICO differs from other types of fundraising mechanism. For those wondering what is ICO, here’s a recap.
During 2016 to 2017, a fundraising scheme which involved the use of the blockchain technology was trending among startups and investors worldwide. It is not only widespread in the financial sector but it expanded to other businesses such as the energy and online advertising sector. This type of fundraising is called crowdsale or Initial Coin Offering (ICO). ICO is much focused on businesses that are solutions for technologies and here is how they are different from other schemes.
Status of the project – everything can begin with just an idea.
Startups begin ICO funding with projects developed on the blockchain. The process can begin with just an initial idea. Firstly, startups need to write a whitepaper which includes details about the project, the funding amount needed, details of the team and consultants as well as details of the token that are used for the investment. The information is the project’s presentation for investors.
The timeline is much shorter than other types of fundraising.
Startups may be familiar with raising funds from angel investors or venture capital which require some time before the funds are acquired. Also, companies that seek IPO may need up to a year for authorities’ approval. In comparison, ICO consumes much lesser time. It may take only a few months and, in some countries, startups have raised several million USD in 30 seconds.
Tokens are what you get from an ICO – not stocks, not products.
In terms of return on investment, ICO is similar to crowdfunding in that it is seeking funds from a crowd by presenting ideas to investors. However, returns are not stocks like in Equity Crowdfunding or products like in Reward Crowdfunding. With ICO, you will receive tokens. These tokens can be exchanged in the cryptocurrency market or some may choose to keep them for speculation. These tokens are named after their companies such as OMG for Omisego.
An online platform where everyone can invest.
ICO is similar to crowdfunding in that it is processed online. Investors and project developers may never meet face to face which differs from venture capital wherein, before the investment, both parties are acquainted.
As of today, it has not been regulated by any department.
This type of investment has not been monitored or regulated by any entity. This differs from IPO wherein each country has their own appointed department. This is partly why ICO has raised concerns among government in different countries. For instance, China bans ICO and they are the first country to do so. China announced that trading or any transactions regarding ICO are against the fundraising regulations in China. They are considered to be illegal securities issuance and Ponzi scheme which may corrupt the financial sector. Therefore, companies which already processed ICO needed to return all the funds to the investors of Bitcoin and Ethereum. Nevertheless, the main emphasis is rather how each countries’ law enforcers define ICO. If they view ICO as securities, those seeking fundings will need to abide by related laws and regulations.
It is considered to be a high-risk investment; careful consideration is recommended.
ICO is rather new with no related law or preventive measures to protect investors and its legal status is still unclear (in the USA and other countries). Therefore, ICO investors need to consider the risk regarding credibility. More importantly, ICO begins at an early stage meaning there is a chance that an idea may fail, thus, they are categorized as a high-risk investment.
In summary, ICO is still a high-risk investment for investors. A recent headline reported about a company in the USA which has been notified by the Security Exchange Commission or SEC to terminate their ICO and make the refund or be prosecuted. Moreover, following the recent trend, new ICO projects emerged every day and, undoubtedly, there are both successes and failures. It is important that investors reconsider and understand the business and what the entrepreneurs are offering. It is best to invest in projects that solve problems in their sectors or deals with the problems that may occur in the future. This is similar to investing in stocks, investors need to seek stocks with long-term credibility rather than hope for short-term profit. For more information on ICO, visit our blog or read more at https://www.slideshare.net/paulark/initial-coin-offerings-an-overview-digital-ventures.