Are you ready to invest and consider an ICO? Or maybe an IPO?
Do you know how is an Initial Coin Offering different from an Initial Public Offering?
Few people actually know, and we agree that the diversified number of funding options for startups complicate things a bit.
We’ll try further on to offer some clear explanations to these rather complex topics and then we’ll shed some light on the main differences between an ICO and an IPO.
What is an IPO?
An Initial Public Offering is a financial strategy employed by private companies that look to develop their businesses by offering shares to the public in exchange for fiat currency.
It is important to emphasize that an IPO is a long-established practice which needs to comply with various government and public regulations under which all involved parties are required to follow some well-established rules.
In the startup environment, an IPO is considered as an Exit strategy permitting investors, angels or VCs recover their initial financial support if they choose to do so.
What is an ICO?
An Initial Coin Offering is a crowdfunding strategy used mainly by startups that look to develop their projects by creating and selling digital currencies or tokens in exchange for financial support.
ICOs are strongly connected to blockchain technology and the startup companies that raise capital this way normally develop projects around decentralized applications.
In the startup world, an ICO is considered as an Entry strategy permitting startup founders collect the necessary money to develop the MVP (minimum viable product) or the prototype into a fully-grown product.
3 Major Differences between an ICO and an IPO
An IPO is subject to legal regulations
Companies looking to issue an Initial Public Offering are required to register with a regulatory authority and issue a legal paper. The paper is called a prospectus and it represents a legal statement by which a particular company starts issuing shares to the public.
All companies running IPOs must adhere to these legal requirements in order to preserve transparency and offer key data about the company, the business and the owners.
All these efforts are meant to attract and encourage potential investors and individuals who look to buy shares.
An ICO is not subject to legal regulations
Initial Coin Offerings are not required yet to come up with any form of documentation.
However, it is expected from an ICO to provide at least a white paper document that is organized by the development team, which can serve the potential investor check the technical aspects of the project.
The white paper also delivers more technical details of the cryptocurrency to be sold and the philosophy behind the blockchain startup.
At this moment there are no existing standards imposed to companies running ICOs and those looking to put money into an Initial Coin Offering must make sure they check from multiple sources the startup founders, their professional backgrounds and the project they develop.
2. Past performance
A company doing an IPO needs to look and act as a serious company
Before selling shares in an IPO, a company needs to indicate:
- Level of minimum revenues;
- Satisfactory track record in the market;
- Accounts verified by accounting companies;
- Backing by investment banks;
- Compliance with exchange requirements.
As you can guess, only established companies that passed multiple testing rounds in the market can enter an IPO in order to sell shares to the public.
A company doing an ICO needs to have a promising project
Initial Coin Offerings are not bound by legal regulations and since they are considered as Entry strategies, companies involved in ICOs do not have (or need) to demonstrate a proven track record.
For these reasons, participating in an ICO is considered to be a risky enterprise and potential investors have a difficult time assessing the project or predicting any potential success.
Nonetheless, before choosing an ICO, a potential investor can check the project’s white paper and the people that are behind. You can check for instance the developers’ experience and the professional background of the individuals that make part of the management team.
Is this their first ICO or startup project? What happened to their previous enterprises?
Shares sold in an IPO represent ownership
To keep it simple, if you buy stocks in an Initial Public Offering you become a shareholder and you are directly interested in the growth and development of that company.
Since an IPO is normally done by companies who prove a consistent track record, shareholders have some good idea of the company and they know how things work in that particular business.
If an investor obtains a good number of shares in a certain company, his voice becomes relevant inside the board of management and can influence the company’s major decisions.
Cryptocurrencies sold in an ICO represent investment
Let’s just highlight the main difference between the two.
In an Initial Coin Offering, the cryptocurrency owners do not also become shareholders of the new company and do not have any ownership or voice in the administration council.
Investors who choose to put money into ICOs hope to benefit from future growth of the company and in the increasing demand of the digital coins they purchased.
Since the cryptocurrency hype reached the largest level at the end of 2017, a great number of ICOs managed to gather consistent financial support.
Recently, major corporations such as Facebook and Google decided that ICOs are not reliable sources of investment and put a stop to their ads on the platforms they control.
As you can see, there are big differences between an ICO and an IPO.
Companies that do IPOs must pass through multiple pre-requisites that need to be fulfilled before being listed on a stock exchange, while startups that choose to run ICOs don’t have to adhere to the same regulations.
And if the stock exchanges are regulated by government agencies, the same is not valid for ICOs.
Nevertheless, right now, there is an increasing demand for regulation on ICOs and we believe it is only a matter of time before regulatory controls and clear guidelines will be imposed.
Until that happens, we recommend to all those interested in Initial Coin Offerings to perform rigorous due diligence before taking any major action.
MStarter is a tech incubator providing startups with valuable services that can prove beneficial for their growth, from tech, marketing and business support to direct funding and fund-raising options.