Since the 19th Century, one of the most popular ways for a company to raise money to expand its operations, has been through a process called Initial Public Offering. However, with the advent of Bitcoin, a new event has become available for investors – called the Initial Coin Offering. Here the two events and processes will be compared and contrasted. Clearly, the IPO process is heavily regulated, in the US, the financial reports must be approved by the Security and Exchange Commission, as well as meet the Market Capitalization standards of the Exchange on which the stock of the Company is to be traded.
In a nutshell, an IPO mostly consists of a Company working together with an Investment Bank, to determine how many shares will be issued and for what prices. This leading investment bank (which is known as the underwriter) will essentially purchases the shares from the Company along with other banks (known as the syndicate), and thaen through its brokers, sell the shares to the public investors. The difference between the initial price and the price at which it is purchased by investors, is the profit for the Investment Banks.
Unfortunately, as Crypto Investor and Analyst – Tai Zen of New York pointed out on the “Cryptocurrency Market”, IPOs are often limited to a small group of participants. In order to qualify to participate in one, one must be a “Qualified Investor” – which usually means a minimum of $1 million to participate. While in theory, such limits are supposed to protect ordinary investors from “speculative risk” associated with new companies which have gone public, in reality, this is simply an artificial barrier to prevent ordinary investors from participating and earning good returns. (Reference)
By contrast, an Initial Coin Offering is much more open to the public. It allows users to register and purchase the virtual money that will be emitted on the day of the ICOs. So far, the track record of ICOs has been rather impressive, with a few fluctuations. To begin with, no underwriters are necessary for ICOs, unlike for IPOs as the virtual currency is created almost instantly. Likewise, no syndicates are necessary and hence no brokers to resell the shares to the investors. Finally, while IPOs tend to be one-day events, ICO can last for almost a month, giving time for investors to participate, no matter how busy their schedule may be.
To elaborate, Edward Hickman explains the structure and the issues facing ICOs in Bitcoinist.net where he reiterates that an ICO allows for the demolition of another hurdle between the ordinary investors and the elite. There are currently no laws and no regulations, and the users are pseudonymous, which is why the ICOs are relatively easy to organize with much less of a capitalization requirement than an IPO.
The brief history of ICOs has been covered by Cointelegraph extensively. One of the most successful ICO was that of MaidSafeCoins (MAID) whose ICO was expected to last 30 days, but investors purchased all the coins within 5 hours. The initial market value was $7 million, but now stands at $10.6 million. However, there was an unsuccessful case with Ethereum’s Ether whose ICO value was at $18.4 million but 198 days after the crowd-sale, users on reddit found that the Company was running out of funds. Another success story was NeuCoin (NEU) whose ICO was just $940,000 but through angel investor funding, it raised $2.25 million from investors such the SVP of Uber and the founder of Candy Crush. As a result, there were sale restrictions on the coins that are set to expire after five years, after which the currency will become much more liquid.
With each new ICO, lessons are learned and investors will be more discerning regarding the long-term prospects of the investment in the currency, rather than speculative short term gains.