While Initial Public Offerings, or simply known as IPOs, have been around for decades now, Initial Coin Offerings, or simply, ICOs are relatively newer to the world. Ever since the BITCOIN was introduced to the world, a new revolution has begun. It is the CryptoCurrency revolution.
People are flocking by the numbers to buy their very own units of crypto currencies. As of 2018, there are more than 900 different types of croton currencies. People in possession of this digital form of currency now want to put their investments to good use. To learn more about the different types of cryptocurrencies in the market, click here. They have an option to further invest their cryptocurrency units into businesses and startups who are in dire need of financial backing to run their operations. This is in the form of Initial Coin Offerings or ICO campaigns.
While you may ask that this is very similar to an IPO, where stocks are issued on a public exchange and people or investors buy these stocks and become partial owners of the firm they have invested. Well, they are different in many ways. We shall discuss the difference in detail.
What is an IPO?
An Initial public offering is nothing but the very first sale of stocks issued to the public by a firm. Prior to the IPO campaign, a company is referred to as a private company. Once the stocks are issued, a small portion of the company is sold to the investor in the form of a stock. These stocks are sold on an international trade platform known as a stock exchange. IPOs are often referredto as Going Public.
What is an ICO?
Initial Coin offerings, or simply known as ICO, is a new fundraising mechanism where Block Chain startups take in CryotoCurrency as an investment. These startups mine their own cryptocurrency units and give them in exchange for the value of cryptocurrency invested by the investor. The investor can also avail certain other services on offer by the company in exchange for the token issued by them.
It is an irregulated form of startup crowdfunding which allows companies to raise as much as capital they wish to and there is no central authority overlooking the entire campaign.
Now that we have defined both the mechanism, let us now do a comparison between them to understand the two further.
Some of the differences are:
- Overlooking Authority
Before any company decide to roll out shares to potential investors on a stock exchange, it is mandatory for it to register itself with a regulatory authority. As part of the registration process, it must prepare a document referred to as a prospectus. A prospectus is nothing but a form of legal documentation which furnishes all the necessary information pertaining to the company. The information could consist of all the key details and about the upcoming IPO campaign of the company. A prospectus instills transparency between the company and its potential investors. With its help, people can decide to invest in the company or not.
In contrast to IPOs, Initial Coin Offerings are not entitled to any sort of legal documentation along with a form of legal requirements. Instead, the Block Chain startup publishes a document called as a whitepaper which outlines the key components of the project. It highlights the purpose and working mechanics of the project. However, there is no preset standard for a white paper.Hence, ICO whitepapers have a lot of creativity included in them which is essential to pull in a potential investor.
- Credibility and history
There is a plethora of legal requirements which a firm must fulfill tosuccessfully list itself on a stock exchange. For example, the firm must meet a minimum threshold earnings limit for it to qualify as a public company. It should have a proven track record as well. The entire process involves the company to be audited by an external agency, typewritten by an investment bank and extensive liaising with various regional and international stock exchanges. Hence, all these formalities have been put into place to filter out the credible companies which are fit enough to reach all the requirements. For any firm to go public, it mustrevive financial backing for certain institutional investors such as Angel investors, venture capitalists, private investors, etc.to name a few.
ICOs follow no such procedure and onlyneed to have a whitepaper document to back them up. This document only outlines the conceptual framework incorporated in the project. It outlines what the future capabilities the project holds. With the help of a whitepaper a customer will get details such as project technicality and information on the team behind the project.
- Efficacy on Offer
As we know that by the means of shares issued on a stock exchange, it represents partial ownership of an investor in the firm. This also makes him/her entitled to future earnings of the firm. The major utility which a person can enjoy through stocks is that they are entitled to receive dividends and can also enjoy voting rights during a shareholders meeting.
- In contrast, by an investment made into an ICO, an investor is entitled to tokens issued by the firm in exchange. However, they are not entitled to any sort of ownership of the project.
- The major utility on offer through ICOs is through the value of token which the investors receive in exchange for the cryptocurrency tokens they have invested into the project.
- Some coins entitle an investor a part in the future returns, while some coins entitle the investors to enjoy certain services in the same ecosystem.
We are looking at future ready services which ICO investors can enjoy. These are services backed by Blockchain technology and are projects of some of the most exciting Blockchain startups in the world right now.
- Offering Duration
IPO campaigns are rather lengthy owing to the legal formalities involved in the entire process. Ideally, it takes between 4 to 6 months for the entire campaign to finish.
This is not the case with ICOs. Once a whitepaper has been drafted and smart contract for the ICO campaign for the project is finalized, ICO service providers can begin the sale immediately. The length of the whole process depends on how long the company takes to raise its targeted financial value. It ideally lasts for a month but when the hype factor comes into play, it can get over in a matter of few days. It is due to its quick and foolproof nature that ICOs are so appealing to Startups nowadays.
- Ease of Access
Not everyone can participate in an IPO campaign. It is accessible to institutional investors such as mutual funds, investment banks, etc. to name a few. In most cases, only a small portion of the company is allotted to normal type retail investors. It means that unless you are part of the mile-high club, it becomes very difficult to acquire shares at an IPO campaign.
Unlike IPOs, an ICO is accessible to almost anyone out there. The most basic requirement is that you will need a base currency either that of the Ether or BITCOIN. These are then converted to your own customized ICO token. Such an easy form of fundraising allows almost every blockchain backed startup to raise considerable amounts of funding very quickly. It is very famous amongst common people as the Bug Companies dominance doesn’t exist here. It gives power to almost anyone who has a good project and a brilliant whitepaper to support it.
ICO vs IPO: Conclusion
Despite not being regulated by any government or centralized financial institution, ICOs are gaining popularity globally. There are hundreds of different ICO campaigns taking place simultaneously. However, governments are looking to form some sort of a regulation to overlook ICO campaigns. For now, it’s safe to say that an ICO is a futuristic mechanism for funding of modern startups.
ICO vs IPO: Which is the Eventual Victor?
While both have their own benefits, it is safe to say that they are very distinct to each other. While one is regulated form of fund raising, and another is a free form of fund raising.
In terms of a more modern outlook, ICOs are gaining steam and are slowly becoming the most sought-after fund-raising mechanisms amongst block chain backed startups. ICOs are currently headed towards a huge market cap which is absolutely astounding because the concept came into existence only a few years ago. A potential investor must do thorough background research be it an IPO or an ICO.
Regardless of how long IPOs have been around for, companies nowadays are looking for a quick and stress-free way of raising funds for their firms. ICO offer that. Hence, as blockchain technology becomes more and more advanced, it is fair to say that ICO will continue to rule the crowdfunding world as they represent the future of crowdfunding for startups.
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