ICO vs IPO? Examine the Differences Between Initial Public Offerings and Initial Coin Offerings
Initial coin offering can be easily compared to the more familiar and ubiquitous IPO – initial public offering – but it’s advisable that you realise the difference between the two. The ICO and IPO could be compared only when it comes to their initial raising of investment in a venture and that this investment is raised in public. Other than that, nothing is the same.
ICO is the digital counterpart of the IPO to the extent that it results in the funding of the business through the issue of tokens. But unlike actual shares of the enterprise, these tokens do not represent any equity in the company. When a share indicates some form of the ownership of the company, a token only represents the ability to buy something that the company is selling (a service, an access to the solution) using that token, or sell that token to someone who wants to transact with that company. This is the major difference which should be realised before making a decision to invest in a ICO vs IPO.
Similar to the IPO, the startup that launches a token sale is looking to raise money for specific purposes. During an IPO such business entity would raise equity capital from investors to build new headquarters, expand a product line, or launching in the new marketplace, by offering them a share of the business in return.
During an ICO, as you will see from the next paragraph, the company is doing almost the same by offering tokens in return for Bitcoin or Ether coins. These tokens can be exchanged to other cryptocurrencies at a later date.
ICOs are not regulating at the time of writing, although various financial agencies are starting to enforce their jurisdictions on the market. There’s little legal control as well. All the ICO team has to present for the potential investors for inspection is the white paper where the new solution or an application is described and business models are outlined. It’s up to investors to investigate the team’s credentials, industry reputation, previous experience to gauge their ability to deliver the promises. There are no legal obligations to the investors except those outlined in smart contracts and the agreement made during the transfer of tokens in exchange for a certain amount of Bitcoin or Ether.
IPOs are strictly regulated. To hold an IPO is a major step for any mature, well-settled company with a good business record and solid financial background. In order to provide truthful information to investors, before the IPO can be started, the company must comply with a range of requirements including third-party audit, a breakdown of their revenue stream, a presentation of company documents for potential investors to inspect. A regulatory body also expects a well-written prospectus outlining the way the money will be spent and the financial forecast for the company resulting from this money injection.
With IPOs, you can invest in any domestic company and for investing in foreign companies you need to hire an investment broker who charges the fee.
With ICOs, anyone can participate except residents of jurisdictions where investing in ICOs is prohibited, for example, USA and China. Despite the ban, the majority of investors in ICOs today come from China.
An IPO allows buyers to purchase shares of the company, with all benefits that come along with it. ICO does not confer any sort of rights on the purchases. It simply allows to buy in when the new cryptocurrency is at its absolutely lowest rate. The hope then is for the price of the new cryptocurrency to rise which can lead to significant profits when the business takes off and generates revenue. A white paper should provide clear explanation about methods of profit generation, as well as details of the solution, the token structure, and the amount of tokens released.
When you purchase stocks during the IPO you automatically earn an ownership stake and claim part of the profit the company generates in the future. As a shareholder, you earn your dividends every year depending on the financial results of the company. You can also make the profit earlier if you trade the shares on the exchange when its value goes up.
With the ICO, tokens do not represent any tangible value, such as corporate assets or a share in revenues. Token holder does not own a single bit of the company. Even if the angel investor has purchased a massive amount of tokens, he has no capability to influence any business decision, unlike major shareholders of companies. Yet there are many ways investors can ensure their revenues, and you have to examine the token structure to make sure you see any return on your investment. Sometimes you earn a profit when you sell it at a fixed price after the ICO, at other times it’s the profit you make after the company starts operating and breaking even. Make sure to examine the white paper and do not skim over any fine print.
Does it make IPO a more reliable project to invest in? No matter how to touch the due diligence was and how many legal checks were completed, there are no guarantees that the business will remain profitable by the end of the year. Both types of investment offer certain advantages and disadvantages. Not a single investment is entirely risk-free.
Before participating in an ICO or IPO each investor must decide whether they are comfortable with high-risk type of investment such as ICO, or they prefer to make a medium-risk, traditional investment such as IPO. In both cases, it’s recommended to do a thorough investigation of the project in question, determine the viability of the idea in the first place, do checks on the founders and their experience and expertise, and only then to make an investment decision.