ICO is an acronym for Initial Coin Offering, and it is the primary way that new companies can use blockchains to raise capital.

Many entrepreneurs have gotten their start in the last decade through crowdfunding sites such as Kickstarter, where anyone can contribute funds to help an idea get off the ground. Obviously, such funding methods were bound to reach new heights when peer-to-peer blockchains came onto the scene. Blockchains allow transfers of value anywhere in the world without regulatory restrictions, for the most part, while the documentation is well preserved and secure. Some new companies have chosen to use open-source blockchain code, such as Ethereum, as the platform for their launch, and to create tokens instead of shares as the means to raise their initial capital. The tokens or coins that they create are built on the Ethereum token protocol ERC-20 in general, which has been made popular for its plug-and-play functionality, which basically lets new entrepreneurs copy and paste the code for a new coin and simply insert the name of their coin along with other pertinent information.

The hope of the Ethereum developers who built ERC-20 was that it would offer a ready-made solution to companies who had a need for a proprietary token for their distributed application or Ethereum-based service. Much to their dismay, dozens of new companies began to launch their own tokens solely as a reason to have an ICO and to raise funds quickly. The ERC-20 protocol was intended to only be used for legitimate applications. ICOs are pretty straightforward, and while they require a significant amount of legwork from the company launching the coin, it is nowhere near as complicated as raising capital the traditional way.

Basically, the public-at-large is alerted that “xyz” coin is going to launch on a particular day, and sometimes coins are available for presale at a discounted rate. The company’s business model is marketed and a white paper for the new cryptocurrency is usually distributed. In most cases, the total number of this particular type of token that will ever exist is stated in the white paper and marketing documents, but there are no disclosure and transparency regulations like with IPOs or SEC-approved private placements. The company sets a target for the number of coins it intends to sell and a target for how many they plan to keep in the company coffers. Online cryptocurrency exchanges may or may not list the new coin. If a coin seems like a good idea, nearly anyone in the world will have access to the coins when they hit the market, assuming they don’t sell out first.

Experts loosely estimate that over 90% of the ICOs seen to-date have been little more than scams. According to Ethereum founder Vitalik Buterin, people can buy a phony whitepaper written by anonymous authors for as little as $80. He and other members of the Ethereum dev team encourage companies not to create a proprietary coin unless it serves a real purpose.