Initial Coin Offerings are ways for new cryptocurrency or other technology companies to raise capital and put their coins into circulation.
For companies too small to attract the attention of a big investment bank, this may be the best option for “going public.” In initial coin offerings, as opposed to using venture capital and initial public offerings of stock in regulated markets, the new company doesn’t actually give up any of their equity (i.e., control) in the company to third parties.
Currently, firms offering ICOs can take money from anyone in the world, not just accredited investors who satisfy the SEC guidelines. Some companies based in the US do choose to comply with SEC regulations and to adhere to some Regulation D or Regulation S guidelines, but as of yet this remains a gray area in international finance where companies and investors can take advantage of the opportunities, and it appears that even companies who filed for Regulation D or S are still raising some percentage of their initial capital from ICO sales, which again could be made available to nearly anyone.
When a coin or token has a use within a distributed application on the Ethereum network, such as tokenizing the time and attention that people give to each website or article that they browse, the investor is exchanging money to have a token of this functionality rather than just an interest in a company. This is where it becomes difficult to fit some ICOs into the existing box for “securities” or the other relevant terms that the SEC is concerned with. This means that investors who would never have been able to participate in such a burgeoning opportunity now have no barriers to entry. This can be good for average investors but it can (and has) also opened the floodgates for many inexperienced investors be taken advantage of by fraudsters whose goal was never to run a profitable company, but only to take the money from the crowdfunding campaign and disappear. In fact, this is a large reason that China and some other countries have banned ICOs altogether.
The fraudsters who give ICOs a bad name aren’t enough to turn the tide, and there are many new companies with good ideas who have raised funds with ICOs. Some of the most influential voices in the cryptocurrency world agree that while a huge percentage of the ICOs which have been offered have been nothing more than scams, it doesn’t change the fact that there is a powerful and legitimate tool here for the use of real entrepreneurs.
Bancor is a company who has created a platform for converting any token on the Ethereum network to any other token on the network without the need for a centralized exchange, and their ICO in June 2017 raised the equivalent of $153 million USD in just over 3 hours, making it the largest crowdfunding campaign to date. It was done without paying a hefty fee to investment bankers, or owing any obligation to any lenders, or giving shareholders a percentage of voting rights. When a crowd is given an interest in the token, they have an incentive to see it increase in value, which gives your company a grassroots marketing team as well as a client base. Some say that these supporters may be better acclimated to fair-weather dealings than young companies are able to deliver: one bad day could put enough downward pressure on their token price to put them out of business, which is something that investment banks and other contractual partners may be less likely to do.