Initial Coin Offerings (ICOs), sometimes called ‘token sales’ or ‘token generation events,’ are a new way for companies to raise money without diluting ownership of the company or having to pay investors back. Initial Coin Offerings are a combination of existing forms of fundraising with a few twists, and the phrase ‘ICO’ seems to have been coined (ha) to evoke connotations with IPOs or Initial Public Offerings of equities. According to icodata.io,220 over 11 billion US dollars was raised between 2014 and mid-2018 using some form of ICO. Early Initial Coin Offerings were Mastercoin (July 2013) and Maidsafe (July 2014) though they used the term ‘crowd sale’. ICOs became popular in 2017.
Evolution of Initial Coin Offerings
Before we go into the details of Initial Coin Offerings, we need to understand the market principles of equity and debt raisings. Traditionally, a company can raise money in any of three ways: equity, debt, or through the pre-ordering of specific products. They can raise money from a small group of investors as is typical in early venture funding, or from a large number, a style of raising money typically called ‘crowdfunding’ that has become increasingly popular.
Crowdfunding is a recent phenomenon using the power of the internet where a project or company can be funded by raising small amounts of money from large numbers of people, often through a web or app-based platform that brings together the projects and the investors, or customers. All types of funding can be raised from the ‘crowd’. Examples of equity crowdfunding platforms are Seedrs, AngelList, CircleUp, and Fundable.
Debt crowdfunding platforms include Prosper, Lending Club, and Funding Circle. Sometimes these are called ‘peer-to-peer lending’ platforms. Pre-funding platforms include Kickstarter and Indegogo and work on a pledge basis, where a project only goes ahead if a certain target amount of money is pledged. This is popular for products that appeal to a niche. Pre-ordering is popular for book and computer game sales.
Companies describe a particular product or service in a document called a whitepaper and announce their Initial Coin Offerings. Investors send funds, usually cryptocurrencies, to the company in return for tokens or a promise of tokens in the future. The tokens can represent anything but usually represent either financial securities linked to the success of the project (and described as security tokens) or access to a product or service created by the venture (and described as utility tokens). At some stage, tokens may become listed on one or more crypto asset exchanges.
In our next tutorial session of Initial Coin Offerings, we take a look into the Token Sale and its underlying process in relation to the Coin Offerings.
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