For decades, Initial Public Offerings (IPOs) have been an exciting opportunity for short-term as well as long-term investors to get involved in the most promising companies of the future. For employees and management staff within these once private companies now going public, the shift is a turning point in their company’s history. For the most part, IPO’s enjoy a reputation of legitimacy and respectability.
However, Initial Coin Offerings (ICOs) tend to be perceived differently by the mainstream investing community. Unlike their counterparts that have been around for decades, ICO’s have existed as a crowdfunding method for only a few years, although managing to raise tens of billions in such a short time.
What needs to be mentioned, however, is that now in 2018, the barriers to entry in this once esoteric area have largely vanished. Investors on both institutional and retail levels now able to jump into the ICO world, and while IPOs and ICOs both share many similarities, there are enough differences between the two that warrants an in-depth evaluation of each.
Definitions: IPO and ICO
An initial public offering is essentially just the very first sale of stocks issued to the public by a company. Before the IPO, these companies were private, not available for public investing via stock exchanges. Once stocks are issued, a portion of the company is sold to the investor in the form of a stock, which can be bought and sold on exchanges throughout the world.
Initial coin offerings, on the other hand, are a new way to raise funds where blockchain start-ups take in cryptocurrency as an investment. These start-ups mine their own cryptocurrency tokens and exchange them in for the value of what investors gave to them in crypto (usually bitcoin or ethereum). Often times, investors can use these tokens for additional services or benefits provided by the company’s platform once it is operational.
Until recently, ICOs were an unregulated form of startup crowdfunding that can potentially allow start-ups to raise as much capital as they desire without any legalized authority overlooking the effort. While this has changed recently thanks to regulators such as the SEC, the idea that this area is an unregulated wild-west has still remained.
In practicality, this also means there’s a big difference between what kinds of companies these are. IPOs are usually meant for already established companies that have existed for a while, have a profitable business, good record, a solid financial outlook, etc. ICO’s usually have none of these things.
For IPOs, there are a number of requirements that need to be fulfilled before it can issue shares to the public, such as a minimum earning threshold and good track record. Traditional IPOs tend to be a lengthy process, involving investment banks, law firms, and various other services. ICOs, which operate all around the world, do not have a standard legal protocol or regulatory framework to operate under. That’s partially why the ICO process is much shorter, and unlike a prospectus, the ICO’s whitepaper is not considered a legal document.
For investors, the investing process is quite different between the two as well. While there can be some legal procedures for IPO investing (especially if you’re investing in a foreign company), the only thing that an ICO investor needs is an internet connection and a computer. In some cases, such as investing in US ICO’s that are deemed as securities by the SEC, some other criteria might apply.
Credibility and Track Record
As mentioned before, there are a host of requirements a company has to fulfill before going public, and most of the time the business in question has an extensive track record prior to it’s IPO. Between accounting firms, investment banks, and law firms all verifying and legitimizing the deal, this lends a level of credibility that otherwise doesn’t exist in the ICO world.
Although legitimate ICO’s and their marketers understand this concern and do their best to mitigate these worries via corporate partnerships, respected advisors, transparent documentation, etc, this level of accountability isn’t shared by most offerings out there. Without what would otherwise be a filter for subpar public offerings, almost anyone with a computer can launch their own ICO, and many have been defrauded in the past years.
Many times, it’s possible for investors that aren’t in the loop to miss out on ICO opportunities. Some crowdfunding campaigns are extremely short, often only a few weeks. At the same time, many of these companies have hard caps regarding the maximum amount of funding they are willing to accept, so there’s more than one way for investors to miss the boat. The most anticipated ICO’s can often be over in hours, if not minutes. This is in stark contrast with IPOs, in which the entire process lasts for several months and remains frequently broadcasted in the public eye.
Perhaps the most common (albeit not necessarily the most importance) question investors ask is “what’s my expected return on investment?” In both IPO’s and ICO’s there is the potential to make a large degree of return, however, there are still differences between the two projects that mean a lot.
IPO’s stocks acquired represent an actual ownership in the stake of the future earnings of the said company. Shareholders are also entitled to dividends as well as certain legal privileges (depending on whether it’s common stock or preferred). ICOs, on the other hand, do not grant any ownership of the project. Depending on how the token is structured, there are many ways to generate a return on one’s investment, although in the case of securities tokens the most common method is through an increase in the tokens market price. Certain coins have built in benefits when used in certain platforms and ecosystems, which is one of the contributing factors along with the tokens utility and demand that determine its value. Although some coins offer a form of a dividend, these altcoins are an exception and not common.
The Future of ICOs
IPOs are likely to continue to exist in the coming years, but the relatively new ICO faces a much different future. While one is an established, regulated form of fundraising, the other is a more free and unregulated form of crowdfunding. Although ICOs have gained an astonishing amount of traction in the past few years, whether or not they will remain the most sought-after form of fundraising among blockchain start-ups is yet to be seen. It wouldn’t be surprising to see the boundaries between IPOs and ICOs consolidate in the future as larger blockchain enterprises seek out more traditional funding while retaining the traditional freedom found in ICOs.
Also published on Medium.