An ICO, better known as an Initial Coin Offering, is a method through which projects get rid of their concealed and remaining crypto tokens and raise funds instead by selling them and buying ether and bitcoin. It is very similar to an IPO, which is an Initial Public Offering, where investors buy and sell shares of different companies.
The blockchain community has seen a prominent increase in the interest in ICOs, even though they are sort of new in the market. A lot of people consider ICO projects to be unregulated, which allows one to raise big chunks of capital through unfair means. On the other hand, some people argue that it might be an innovative approach to the usual venture-funding prototypes.
A decision has been reached by the US Securities and Exchange Commission (SEC), which focuses on the current position of tokens which are issued by the DAO ICO and have forced multiple investors to rethink their funding methods in ICOs. One of the most vital measures of this decision is to check whether the token clears the known Howey test or not. In the case where it fails to pass the test, it becomes compulsory to treat the token as a security and subject it to various restrictions that are imposed by the SEC.
The presence of a technology similar to the ERC20 Token Standard makes it easy to structure ICOs. Such technology abstracts a good amount of the development processes, which are needed to invent new cryptographic assets. Majority of the ICOs function by having their investors transfer the funds to a contract which stores the money and distributes equal amounts within a fresh token at another point.
If we were to assume that the token is not a security, then there are very few restrictions as to who is eligible to take part in an ICO. Given that the money you are taking is from a worldwide group of investors, we see that the amounts raised within ICOs tend to be enormous. The biggest problem with ICOs may be that the money raised within them is pre-product, allowing the investment to become risky. On the flip side, a counter argument says that this style of fundraising is necessary to incentivize the development of the protocol.
Let us try to put forward some historical context about ICOs and their trends before we choose to jump into the discussion of the benefits of ICOs.
In 2013, various projects funded their own development work using a crowdsale model. Ripple was able to pre-mine one billion XRP tokens as well as sell them to investors who were able to give bitcoins in return. Ethereum was able to raise over $18 million at the beginning of 2014, making room for the biggest ever ICO completion at the time.
The initial attempt for fundraising for Ethereum’s new token was the DAO. It aimed to create an organization which would fund various projects related to blockchain through governance decisions that would be taken by token holders. Even though the DAO raised a tremendous sum of money – $150 million – it was vulnerable and a hacker was able to extract the funds with an attack. It was decided by the Ethereum Foundation that it would move ahead to earn back the funds that were stolen.
Even though the beginning of funding a token on Ethereum had failed, developers were insistent that the platform was much easier to use as compared to the typical venture capital structure. To be specific, the ERC20 standard made it convenient for a team of developers to invent cryptographic tokens within Ethereum’s blockchain.
Certain people may believe that Ethereum’s biggest projects may be those that are crowdfunded, but such a big amount of money has not been raised by pre-product initiatives and startups before. This ICO has come into the view of the world with few regulations and convenience in usage.