ICO or initial coin offering is a new model of funding that is directed towards raising the capital of smaller business. Also known as ‘crowdsale’ or ‘token sale,’ ICOs serve the purpose of a hybrid-model of crowdfunding pre-sales and stock IPOs that can lessen the barriers for similar business and investors.
ICOs offer cryptocurrency-based tokens that function differently, depending on the platforms they are designed for. Businesses either receive bitcoin (BTC) or ether (ETH) in exchange for tokens, which they use to raise funds to meet future expenses. So far, this hybrid model of funding has been a superb success. The recent success is enjoyed by Aragon, an independent business platform that has raised $25 million in less than 15 minutes, and by Brave’s BAT (Basic Attention Token), which succeeded to reach $35 million in 24 seconds in crowdfunding.
It can be said that the ICO hype is real and have proven to be successful in raising a huge amount of capital in a short period of time. Aragon, Status, TenX, Aeternity and Bancor protocol, which recently excelled the DAO in funding are some of the unique projects that have raised capital via ICO platform.
ICOs Regulation – How are they regulated?
ICOs are still in the legal gray area. The tokens are not securities and currencies, and they do not fit in any traditional asset class. Many claim it to be not an investment nature at all and comes with a lot of uncertainties. As per Van Valkenburgh of Coin Center, a nonprofit organization, ICO is still unclear. It is a trendy term that is used to describe a menagerie of new things and activities like, tokens, cryptocurrencies, pre-sales, pre-mines, etc.
In the U.S, Howey Test is performed to determine whether a transaction is considered as security. But, there is a lack of regulatory clarity, especially in the U.S, has forced many investors like Blockchain Capital, to exclude unaccredited investors and they look for crowdfunds from places like Singapore and Switzerland.
What’s got people excited about ICOs?
Over the past two years, ICOs have gathered millions of dollars from the investors and have become prominent than ever. This has drawn the attention from Government regulators. As per the statistics, ICOs have raised approximately $300 million over the last six months, with projects originating from the Ethereum network.
The ease of transferring wealth globally became almost effortless due to the decentralized nature of public blockchains like Ethereum and Bitcoin. Now, because of these effortless transfer, investing in a good business is available to everyone. Tokens does not bestow a particular right to the holder, but it allows to speculate on adoption, helping to create liquidity. This lets the developers to capitalize their projects and accomplish it.
By using tokens, entrepreneurs get the chance to open their projects to the global audience, letting them get the attention and raise capitals from savvy investors. There are many ICO profiles including Gnosis, the inventor of the Reverse Dutch Auction, raising $12million in 12 minutes and Storj, which raises $30 million for their decentralized cloud storage platform.
ICOs act in a similar way to crowdfunding by allowing anyone to buy a new venture via a cryptocurrency wallet. The craze surrounding ICOs has also brought a new kind of interest, that is institutional investors. Firms like CyberTrust is trying to bridge the gap between crypto financial markets and traditional markets by generating asset-backed derivatives, simply based on crypto-assets.
This hybrid model of funding is not just for short-term goal but also has scope for long-term profits. With the increase in cryptocurrency value over the last 12 months, ICOs have become a lucrative way to raise currency. In previous crowdfunding exercises, the speed of raising money is also unheard of. Bancor raised $153 million in 3 hours in June 2017 when it started selling its tokens.
As ICOs are not governed by any regulatory body, it permits the firm undertaking fundraising to withhold the information from the public. Startups can avoid undergoing through anti-money laundering laws, audits and ‘know-your-customer’ rules by registering token as a currency.
Many are concerned with the ICO madness and are wondering about its effects on the ethereum markets. Uncertainty and concern are regularly discussed topic, hoping it will not rebound on the Bitcoin ecosystem.