An initial coin offering (ICO) is a way for startups and projects to raise capital by selling digital tokens or cryptocurrencies, akin to how companies raise money through initial public offerings (IPO) in the traditional stock market, explained CMO of Cryptology.com Kerel Verwaerde.
“But instead of shares, investors receive tokens that may offer some utility within the project’s ecosystem or represent a stake in its future success,” he added.
And this is exactly where the similarities end, noted Jeff Owens, co-founder of Haven1. Indeed, ICOs and IPOs are subject to different regulatory frameworks, involve different types of financial instruments (stocks versus crypto tokens), and, due to the nature of the crypto market, ICOs are usually associated with start-ups, while IPOs are typically conducted by well-established, large companies- added Owens.
To put these in context, Juan Bruce, co-founder and Chief Strategy Officer of DSCVR, noted that ICOs somewhat faded from the U.S. scene following the ICO boom of 2017 and 2018, largely because of regulatory issues.
Indeed, while ICOs gained popularity in 2017, which saw numerous projects raise substantial funds using this method, it’s worth noting that, due to the lack of regulatory oversight, several ICOs have turned out to be fraudulent or failed to deliver on their promises, so caution is warranted, Haven1’s Owens added.
Yet, there seems to be a bit of resurgence of pro-ICO sentiment in the crypto community globally because, if done correctly, token distributions can seed a wide user base in Web3 applications.
“We’re seeing new variations of these ICO-like distributions playing out in various ecosystems, including Solana, which is seeing many projects utilize airdrops,” DSCVR’s Bruce added.
Pros of ICOs
According to Cryptology’s Verwaerde, ICOs democratize fundraising, as they open investment opportunities to a broader audience beyond traditional venture capitalists and institutional investors.
“This allows individuals from anywhere in the world to participate in funding innovative projects,” he said.
Cons of ICOs
On the other hand, he noted that ICOs have high volatility…