ICO's: What are they?
In light of the recent "ban" on ICO's by the PBoC, I thought I'd learn a thing or two about what's going and share it here...
So what is an ICO?
An initial coin offering (ICO) is a way for new tech startups to fund its operations through the sale of virtual tokens. Investopedia defines ICO’s as:
“An unregulated means by which funds are raised for a new cryptocurrency venture”
ICO’s are similar to crowdfunding ventures and initial public offerings (IPO’s) in that small amounts of currency are gathered from a large pool of donors or investors to raise a substantial sum of money (capital). But that’s pretty much where the similarities end.
In an IPO, a private company, large or small, issues shares for sale to the public for the first time. Therefore, in exchange for legal tender, the investor gets partial ownership, or a small stake in the company and the company gets the investor’s money.
To launch an IPO, a company must overcome many regulatory hurdles from both the government and banks. This process in itself is time and money consuming. You first have to demonstrate that your company is already capable of making money. You have to hire lawyers, underwriters, chartered accountants (CPA’s) and SEC (or regulatory agency) experts to make sure the IPO doesn’t fall short of the law. You must also be able to project your future financial performance and show that you have a sound business plan.
ICO’s are a great way for cryptocurrency startups to circumvent all of the above to raise capital for their projects. Startups typically issue ICO’s by first releasing a whitepaper that outlines what their project is about, their plans and objectives, how many virtual tokens will be made for sale and how many will be kept by the owners, the price for each token and how long the campaign will last for. The tokens are then typically sold to enthusiasts via a crowdsale.
For example, Ethereum Project sold tokens called Ether initially at 2000 ETH per Bitcoin to raise approximately $18 million before the system went live on July 30. That was when Ether became the cryptocurrency of the Ethereum blockchain, with the launch of the Genesis Block.
I will be blogging more about ICO’s in the coming days.
If there are any inaccuracies in my post, please let me know in the comments below. I’m still learning.
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