Is ICO the New IPO?

Desfran - Is ICO the New IPO?

“Going public” is a commonly heard statement amongst companies. Most businesses have always aimed to reach this milestone as it is a symbol of their growth. By going through an Initial Public Offering (IPO), companies can raise more funds to support their rapid growth whilst increasing credibility and exposure.

Traditionally, an IPO is a more viable option for average investors to gain access to high growth companies. As a result, companies will be able to raise capital quickly since they can reach out to more investors. Despite the slightly lagging IPO rating in 2019, several unicorn companies continue pursuing their intentions to go public in 2020. These include Airbnb, Doordash, GitLab, and Asana.

The process of going public can be time-consuming, which makes it less attractive an option for fairly young companies who are looking to grow at a rapid rate. At the same time, the expenses of going public—underwriting fees, filing fees, reporting, and disclosure requirements—can strain the company’s budget and overwhelm overall operations.

Fortunately for companies looking for speedy recognition in today’s fast-evolving financial landscape and the rise of cryptocurrency, new crowdfunding schemes have emerged and one of the most prominent of these is the Initial Coin Offering (ICO). An ICO allows startups to fast track their ideas. The average investors could then easily gain access to the early stages of funding where most profits can be made, which, in an IPO, would be restricted to accredited/ angel investors.

The rise of blockchain technology and digital currencies caused a paradigm shift in the way businesses raise funding. One important note is that these innovations still need necessary improvements to fully address the ever-changing market needs, thus the risk could be unpredictable. Companies must recognise the important differences between IPO and ICO, thereby adopting a model that is in line with their business needs and growth.

In What Ways Do ICO Differ from IPO?

Understanding the frameworks and how IPO and ICO work is a crucial step in the fundraising process, and serve both short-term and long-term goal-achieving purposes.

Essentially, before an IPO is initiated, the company is a private entity with a relatively small number of shareholders including early investors like the founders, venture capitalists, or angel investors. Once it decides to go for an IPO, the firm might need to hire an underwriter which is often an investment bank to advise and fund the project.

An ICO process usually begins when a cryptocurrency startup produces a white paper that contains a project’s outline identifying a problem and proposing a solution to it. During the ICO period, supporters can purchase the project’s tokens using fiat or digital currencies (e.g. Bitcoin or Ether). These tokens represent the shares of the company sold to investors, just like stocks in an IPO.

Looking deeper, in what ways does an ICO differ from an IPO? Here are 5 key differences:

Desfran - Is ICO the New IPO?

Looser Investor Requirements

Because an IPO’s intention is to raise an incredible amount of money for the organization leading up to the day it goes public, target investors are typically large institutions such as banks. Individual investors might not be able to get in on an IPO before its first trading day unless they have millions of dollars on hand to give. Investing in a company in your own country is a more straightforward process vis-à-vis investing in a foreign country, which requires additional legal procedures. More often than not, potential investors need the services of a broker to invest in a foreign company.

As for ICO, the only investor criteria is internet access. In other words, investors can buy any tokens whenever and wherever they are. One exception to this is some US projects that are defined as securities, such as the one blockchain protocol EOS.IO had, which got the company a $24 million penalty for violating US securities laws.

Various Investor Gains

Stocks that are acquired through an IPO is a representation of the investor’s stake on the company’s future earnings. Shareholders get yearly dividends or they can opt to sell the stock for capital gain once its value increases. Certain investors can be given voting rights that might lead to decisions that affect the future direction of the company.

On the contrary, in an ICO, tokens that are rewarded to the investors do not grant ownership of the project. A token is a symbol of a contract, what it stands for is solely decided by each company. In some cases, investors can sit on the dividends or hold onto these tokens and hope to sell it, just as shares in an IPO. You may get lucky and double your investment in three days as Ether’s investors did in 2017. If it’s a fashion startup, one token can be equal to one dress. Or the tokens only give you a right to come to their offices and eat in their dining room anytime you want. Whatever it is, it is stipulated in the company’s white paper, read it through carefully before your purchase as the outcome might not be what you expected.

Shorter Duration, Simpler Procedure

One significant feature that makes an IPO a challenging process is its long duration, which is due to the legal and accounting processes that the company must go through. If coordinated and managed properly, it should take an average company between six to nine months to go through an IPO.

In an ICO,  companies can potentially start as soon as possible, with or without a white paper, since it is only recommended but not required. After a firm’s product and token are created, they can raise some buzz and start with the crowdsale which can take up to a month at most.

Accessible and 24/7 Trading

As for the IPO, shares are publicly traded by listing on stock exchanges such as the commonly known New York Stock Exchange (NYSE), Stock Exchange of Hong Kong (HKEX), and London Stock Exchange (LSE). Payments are made using fiat currencies and are executed in a short timeframe. The stock exchanges are subjected to opening hours based on countries’ working norms.

One of the factors which made ICO a preferably more widely adopted method of crowdfunding is the accessibility. Startup cryptocurrencies often seek to list their project on a crypto exchange platform, which allows their tokens to be bought and sold 24 hours a day.

More Liquidity, Yet More Volatility

One natural advantage ICO poses is the liquidity of cryptocurrencies. Instead of tying up vast amounts of funds in a unicorn startup and waiting for the long play — an IPO or an acquisition — investors can see earnings sooner, and can more quickly generate profits from ICOs. All they have to do is convert their cryptocurrency profits into Bitcoin or Ether on any of the cryptocurrency exchanges that carry it, and then easily convert it to fiat currency via online services such as Coinsbank or Coinbase.

One systematic risk with ICO tokens would be the higher levels of volatility because of the lack of a structured system, regulations, and transparency. These make prices of these tokens susceptible to artificial increase before shortly crashing.

Desfran’s Value Proposition

Expanding a business or starting a new venture can definitely be financially challenging. Both IPO and ICO have different merits which might benefit a growing company based on the nature of their company and business. Navigating the fund-raising landscape might be daunting for a company looking to grow faster. A thorough understanding of regulations and the various fund-raising options for your company based on your current needs are what our consultants can provide for you. Let us take care of these while you focus on setting directions for your company’s growth.

Contact us today to learn more.

References

Ethereum Has Doubled in Just a Few Days, ccn.com

Initial Coin Offerings (ICOs): Market Cycles and Relationship with Bitcoin and Ether, Small Business Economics

Initial Coin Offerings (ICOs) Are Becoming the New IPO, Thebalance.com

Understanding What ICO and an IPO Is, And The Relationship Between Blockchain And Cryptocurrency?, Towardsdatascience.com

Initial Public Offering (IPO), Investopedia.com

Initial Coin Offering (ICO), Investopedia.com

How To Buy ICO Tokens: Beginner’s Guide, Cointelegraph.com

ICO Vs IPO: Key Differences, Cointelegraph.com

ICO Law and Compliance: Is Your ICO Subject To Regulation?, skalex.io

Spotlight on Initial Coin Offerings (ICOs), sec.gov

What is a Cryptocurrency Crowdsale?, thebalance.com

What is an IPO and How Does it Work?, thestreet.com

What Is An ICO Token And How Does It Work?, Cointelegraph.com

What Initial Coin Offerings Are, and Why VC Firms Care, Harvard Business Review

Scroll to Top