If there’s one word on everyone’s lips in finance right now, it’s cryptocurrencies. If you’ve been blaming yourself for missing out on blockbuster currencies like Bitcoin and Ethereum when they first launched, you might want to consider investing in an initial coin offering (ICO). However, even under the best of conditions, ICOs are extremely dangerous and have a significant chance of being scammed.
So What Exactly Is an ICO, Anyway?
You’re a Silicon Valley startup with a brilliant new cryptocurrency system concept. Perhaps you’d want to digitalize and encrypt the payment mechanism for parents and babysitters. What a brilliant concept! Let’s name it BabyCoin for short.
The main issue is that you’ll need people to donate your money to create the currency. You could go to a bank or try to find venture capitalist investors, but what if you could acquire funds without giving up any of your company’s ownership? Then there’s ICO.
This is how it goes. You construct a lovely website, write a white paper that explains why it’s a wonderful concept that might be extremely beneficial, and explain why it’s a great idea that could be very useful. Then you offer others to pay you money (most commonly Bitcoin or Ether, but you may also accept fiat) in exchange for Babylon. They expect that Babylon will be widely utilized and circulated, hence increasing the currency’s value.
Read More: UMA Crypto: Everything You Need To Know
It’s crucial to know that, unlike an initial public offering (IPO), investing in an ICO does not entitle you to a share of the firm you’re supporting. You’re betting that the now worthless currency you have will be worth something in the future.
Who Can Launch an ICO?
An ICO can be launched by anybody. ICOs are currently unregulated in the United States, which means that as long as you can build up the technology, you’re free to try to have your currency financed. At the moment, the cryptocurrency is akin to the Wild West, with gold in the hills and nothing in the way of regulation. This may either work to your advantage or lead to you being duped. An ICO is arguably one of the easiest ways to put up a fraud out of all the fundraising options. There’s nothing stopping someone from putting in all the effort to make you feel they have a fantastic concept, then disappearing with the money since there’s no regulation.
This implies that if you’re serious about investing in that new ICO that your coworker Aiden informed you about, you’ll need to do your homework. The first step is to ensure that the persons behind the ICO are legitimate and responsible. It’s ridiculously simple to obtain a stock photo and put up a convincing website in the Internet era, so going the additional mile is crucial.
What history the product’s leads have with crypto or blockchain is one thing to check for. It’s a red flag if they don’t appear to have someone with relevant experience who can be easily confirmed.
Types of Initial Coin Offerings
The two types of initial coin offerings are listed below:
Only a small number of investors are allowed to participate in private initial coin offerings. In general, private ICOs are only open to authorized investors (financial institutions and high-net-worth people), and a firm can opt to establish a minimum investment amount.
Initial coin offerings (ICOs) aimed at the general public are a type of crowdfunding. Because practically anybody may invest in a public offering, it is a democratized type of investment. Private ICOs, on the other hand, is becoming a more realistic choice than public offers due to regulatory issues.
The popularity of ICOs is being boosted by the emergence of cryptocurrencies and blockchain technology. In 2017, more than $7 billion was raised through initial coin offerings (ICOs). In 2018, the number nearly doubled. Telegram, a provider of instant messaging services, had the largest initial coin offering (ICO) to date. The UK-registered corporation raised almost $1.7 billion during a private ICO.
How Does an ICO Work?
An initial coin offering is a complex procedure that involves a thorough understanding of technology, finance, and the law. The fundamental idea behind ICOs is to use blockchain technology’s decentralized networks in capital-raising efforts to align the interests of multiple stakeholders. The following are the steps involved in an ICO:
- Identification of investment targets
Every ICO begins with a company’s desire to generate funds. The company determines the fundraising campaign’s target audience and prepares the necessary materials for potential investors to learn more about the company or project.
Read More: About Social Finance (SOFI) Cryptocurrency
2. Creation of tokens
The generation of tokens is the next step in the initial coin offering. To put it another way, the tokens are blockchain representations of an asset or utility. The tokens are tradeable and fungible. Because the tokens are just adaptations of current cryptocurrencies, they should not be mistaken with cryptocurrencies. Tokens, unlike stocks, do not often give an equity share in a corporation. Instead, the majority of the tokens provide their owners with a share in a company-created product or service.
The tokens are produced on blockchain platforms that have been mentioned. The process of creating tokens is very straightforward since unlike the production of new money, a corporation is not necessary to build code from start. Current blockchain systems that run existing coins, such as Ethereum, instead allow the creation of tokens with small code changes.
3. Promotion campaign
A corporation will normally undertake a promotion campaign at the same time to attract possible investors. It’s worth noting that most campaigns are run online in order to reach as many investors as possible. ICO advertising is now prohibited on numerous significant web platforms, including Facebook and Google.
4. Initial offering
The tokens are then offered to investors after they have been created. It’s possible that the offering will be divided into numerous rounds. The firm may then utilize the ICO money to create a new product or service, while investors can either use the tokens they purchased to benefit from this product/service or wait for the tokens’ value to appreciate.
The initial coin offering is a completely new phenomenon in the world of finance and technology. The introduction of ICO’s made a significant impact on capital-raising processes in recent years. However, regulatory authorities around the world were not prepared for the introduction of the new fundraising model in finance.
Approaches to the regulation of initial coin offerings vary among different countries. For example, the governments of China and South Korea prohibit ICOs. Many European countries, as well as the United States and Canada, are working on the development of specific regulations to govern the conduct of ICOs.
At the same time, there are already published guidelines governing ICOs in a number of countries, including Australia, New Zealand, Hong Kong, and the United Arab Emirates (UAE).
How Do I Determine Which ICOs Are Good?
Just remember to do your assignment. Because ICOs are so poorly regulated, you must exercise far greater caution than you would when investing in an IPO. Read the white paper, look at the team members’ backgrounds, and make sure they have experience with cryptocurrencies.
You may also use reputable services such as Coinschedule.com, which only selects ICOs that they have examined and believe are legitimate and intriguing. While you should not put your complete reliance on any website that provides a listing, they may be quite beneficial.
Is Someone Going to Regulate ICOs?
In December 2017, the Securities and Exchange Commission (SEC) classified ICO tokens as securities, with SEC Chairman Jay Clayton stating at the time that he demonstrated that they were securities “a token is a token under our federal securities laws.” The security was there because it was an investment contract. We came to the conclusion that the token selling was a financial investment in a shared venture with a realistic expectation of benefit from others’ entrepreneurial or management activities.”
This indicates the SEC is preparing to take action against ICOs that they believe are deceiving investors. The first strike occurred on December 11, 2017, when the Securities and Exchange Commission (SEC) suspended Munchee, a California-based meal review app. Munchee was trying to generate funds to develop a cryptocurrency that could be used to order meals through the app. This is the first time the SEC has issued a cease-and-desist order for an unregistered securities ICO. Is this a sign that the hammer is ready to fall? We’ll have to wait and see.
The Bottom Line
Finally, ICOs are a brand-new means of obtaining funds, and everyone is attempting to figure out how to use them without being burned. If you think you can make a fortune on a potential new ICO, make sure you do your research first. ICOs, like cryptocurrency, are all about taking on high risks and reaping a big profit.