With the advent of blockchain and cryptocurrency, Initial Coin Offerings (ICOs) are gaining popularity in recent years. ICOs are a means of crowdfunding via an event where coins and tokens are offered in exchange for money or other digital currencies. To give an idea of the scale of ICOs, Filecoin recently raised USD$257 million in September 2017. In contrast, an Initial Public Offering (IPO) is the initial sale of shares on a publicly listed company – a more familiar concept in the financial markets.
With the introduction of ICOs as a capital raising medium, how has this impacted the way companies behind cryptocurrency products raise funds?
The effect of ICOs on the capital raising process for companies with a cryptocurrency product can be summarised by the key differences between an IPO and ICO:
ICOs are not bound by legal requirements to issue legal documentation. However, typically white papers are created by the developers to outline key project information. This means that ICOs can be listed at any time, without regulatory enforcement or the requirement to meet certain standards. On the other hand, IPOs are required to register a prospectus with a regulatory body that represents the legal declaration of the issuance of shares to the public. It is worth noting however, that regulation for ICOs is beginning to shift toward treating digital currencies, and by extrapolation – ICOs, as securities in the way that shares are treated.
IPOs have certain requirements that are required to be fulfilled before they can be executed. The process can involve requirements from the exchanges the company is being listed on – these can involve audits by professional accounting firms, and underwriting by investment banks. Additionally, due diligence should have been performed if the company has previously been funded by institutional investors, providing the additional credibility behind them. On the contrary, companies behind ICOs do not need to undergo a due diligence process – funds can be raised easily even if the product is experimental.
ICOs have no restriction in regard to access to offerings. IPOs are typically only open to institutional investors. Retail investors may only be able to purchase shares once it has been listed and available on exchanges. ICOs can be participated by anyone, and comes closer to crowdfunding that ICOs do. In this way, the companies behind ICOs can raise funds from a much larger crowd that may also be much more eager to invest in a product with lower credibility on the basis of its potential.
The concept of ICOs have drastically changed the way some companies raise funds – companies are no longer limited to public listings that require an extensive process and are subject to heavy regulation. Companies that deal in cryptocurrency solutions now have a different channel to raise funds that do not have the same limitations encountered in an IPO.