An Initial Coin Offering (ICO) is a fundraising tool that was developed for aspiring cryptocurrency developers. ICOs are similar to an Initial Public Offering (IPO), which is a real-world fundraising tool that allows investors to adopt early shares of a public company. While an ICO and IPO share many similarities, they are not the same thing.
In the field of cryptocurrency, there is currently very little in the way of regulation. However, despite a lack of regulation, there are many optimistic crypto developers who all feel that they have the next big thing. As developers and coders seek to become the next Bitcoin, they must explore ways to establish themselves a base of operations from which to work. In order to become successful as a crypto developer, an ICO is required.
What Is An ICO?
In cryptocurrency, if you want to raise money but lack any real fundraising tools then you can consider giving away tokens to early adopters of your coin. In exchange for either fiat or cryptocurrency (typically Bitcoin or Ethereum) your early adopters will receive something known as a baby token. A baby token is a way to refer to new coins on the market that are not backed by actual viability, at least not yet.
Investors in an Initial Coin Offering are doing so in the hope that the coin that they buy into will blow up into the ‘next big thing’. Imagine being an early adopter of Bitcoin, trading in relatively small amounts of fiat currency in exchange for crypto tokens that would go on to become incredibly valued. In this way, an Initial Coin Offering is a little bit like playing the lottery. The crypto tokens that you are buying via the Initial Coin Offering may turn out to be worth a lot of money. These same coins may also turn out to be completely worthless.
The History Of ICO’s.
ICO’s burst onto the scene in a real way back in 2013 when Ripple pre-mined more than 1 billion of their own coin’s tokens. The XRP tokens that Ripple’s developers mined were traded away to investors for Bitcoin and fiat currency. The developers of Ripple would go on to use their early adopter’s ‘trades’ in order to develop their coin. Now, XRP is a dominant player in the cryptocurrency market. This is a situation where an ICO was extremely beneficial to both the developer and the early investors.
In a similar fashion, the developers behind Ethereum made history with their own ICO. Ethereum’s Initial Coin Offering hit the market in 2014 and through an investor exchange in baby coins, the Ethereum team was able to raise more than $18 million. Ethereum stands as one of the most effective ICO offerings in the relatively young history of the cryptocurrency market.
Investors are already coming to the conclusion that an ICO may offer a more responsible and effective way to raise money than traditional startups. ICOs have the benefit of working in a completely digital space with a digital product that can be developed at any time. Unlike traditional investment models, the digital space allows for a proverbial untapped market to be exploited.
Are ICO’s Legal?
Despite the impact ICOs have had on the development of cryptocurrency, there are very real concerns about the concept. ICOs are rife with opportunistic scammers who are looking to make a quick dollar on investors that are desperate to buy into the next Bitcoin.
The simple truth is that an Initial Coin Offering can be started by anyone. Literally, any person with an idea and a little bit of charisma can start up their own token. For that reason, you’ll see celebrities like DJ Khaled, Floyd Mayweather, and even Jamie Fox are pushing their fans to invest in their own coins. There are no rules, regulations or systems of quality control. Much like cryptocurrency itself, ICOs represent an echo of the Wild West where everyone is seeking to get to the gold underneath the hills.
With all of that being said, ICOs potentially represent a legal problem. ICOs currently exist in a grey area, which has led the Securities Exchange Commission (SEC) to make a ruling on the subject. The SEC decided to classify tokens derived from ICOs as securities back in 2017. Jay Clayton, the Chairman of the SEC, ruled that a token would constitute as an ‘investment contract’ between the coin founder and their early adopters. As ICOs become more and more popular there are likely to be more concrete rulings coming from the SEC.