The new and popular method to fund private Blockchain-based startups called ICO (Initial Coin Offering) is gaining traction much like the traditional use of Crowdfunding. This new method of funding is currently unregulated in many areas around the world, as particular jurisdictions are developing laws to prevent ICO scams and ensure regulation. Although this new strategy is not fully regulated, it is trending as the new Crowdfunding method. The Cryptocurrencies are here to stay, and this type of funding is only becoming more popular as there are about 20 offerings per month as of May 2017. One of the first mainstream and successful ICO’s is the Kik app. The Kik app offered the Kin token and issued 50 million dollars worth.
How does it work?
ICO is much like an IPO (Initial Public Offering), the traditional way of investing into a company, the only major differences are the ownership rights. The ICO method does not give up any ownership of the company to the investor. Therefore, the investor does not own any part of the company and will not receive any dividends. However, the investor is purchasing the Coins / Tokens that the company has created. These Coins are indexed as a cryptocurrency and can be purchased in the same way as Bitcoin and Ethereum. Investors which are purchasing the Coins are making a profit on the fluctuation of the coins value. So by purchasing the Coin at a low price, and selling high, the investor will make a profit. Unlike the traditional IPO, the typical ICO has a pre-designated price valued based on the funding needed, and will remain static in pricing until the end of the ICO period. The ICO value is increased by additional purchases.
Comparing ICO to Crowdfunding
Now that you are familiar with the ICO concept, we can further compare it to a typical Crowdfunding campaign, as both funding methods share distinct similarities. For instance, they both use the Crowd to fund the business and utilize various platforms as a hub to run the campaign. See image below:
This is an example of a Crowdfunding platform with Campaigns:
This is an example of an ICO platform with campaigns:
For investors/backers, there are alternative differences, such as the market value of each funding method. Backers that are investing into rewards based Campaigns much like the ones you would see on Kickstarter or Reach will know the outcome of the product. There is typically a prototype already built so the backer can compare with other similar products and predict the potential success of the campaign, whereas those investing into an ICO may not know the outcome of the product. This makes predicting the potential success of the product difficult for the ICO investor. Just to demonstrate the popularity and growth of this new funding method, below is a chart that compares VC funding with ICO in total funds raised:
As you can see, the total ICO funds raised has surpassed that of your typical Angel & VC Funding on the internet in recent years.
Much like Crowdfunding, investors need to be careful in choosing the right campaign to invest, as there are various scams in the early stages that can be performed such as the “pump and dump” method for ICO’s. In addition, the SEC has announced that the ICO method can provide a “fair and lawful investment” opportunity. It also opens up the opportunity for those anywhere around the world to invest, as these coins can be obtained using any type of currency.
Although there are various risks involved with ICO’s, many companies are jumping on this bandwagon to generate funding for the company. It is not promised that the ICO concept is going to stay, but certainly, has good potential. With SEC and jurisdictions regulations, it can become a new standard method for Crowdfunding.