IPO vs ICO: will ICO eventually take over the market?

The differences between ICO & IPO

At first, ICO was often described as IPO for blockchain projects. Although it’s become apparent that the comparison isn’t legit, still we’d like to discuss the reasons that caused the confusion and the differences that lie in the core of these two notions. The main difference is that with ICO an investor doesn’t get traditional shares, but cryptographic tokens traded at dedicated exchanges for cryptocurrency. Technically, tokens are not tied to shares or any other form of property, and they don’t entitle backers with any rights, as it is the case with traditional shares.
What is IPO? Initial Public Offering (IPO) is the process by which a private company can go public by sale of its stocks to general public. Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital.
What is ICO? Initial Coin Offering (ICO) is a crowdfunding source for blockchain startups. The term ICO emerged as the analogy to financial term IPO. The ICO usually takes place before the project is completed, and helps fund the expenses undertaken by the founding team until launch. The ICO participants are invested in the success of the project.

1. Equity vs Tokens

When participating in IPO investors get in return stocks which means that the investor owns a fraction of the company. As a rule, investors have a right to participate in the company management process with voting shares, and. Of course, receives dividends. The sooner you jump in, the more money you eventually get. For example, when Facebook went public in 2012, investors, who had the company share in 2005, earned 200000% income. Until recently, if a company issued tokens when going on ICO, that didn’t suppose any legal obligations. Some tokens may be exchanged by a company’s services, other tokens don’t have other value than speculative and are obtained with the hope to gain on token price growth in the future. The tokens themselves do not offer the holder any particular rights or actual equity in these projects, but they allow the contributors to access any platforms or features that the developers create in the future with the token.

2. Regulations

IPO are strictly regulated by the law and a company that wants to sale their stocks publicly have to pass through a list of requirements. ICO aren’t regulated at all and don’t have to undergo through complicated procedures which many see as an advantage for both investors and projects. However, the absence of any regulatory requirements means that investors aren’t protected at all and are subjected to a great number of risks. Due to the lack of any overseeing committee, the number of scam projects that see ICO as an easy way to collect money have increased. Still, there are some attempts to put Initial Coin Offering on regulatory basis and shield investors from potential fraud. Thus, in July 2017 DAO tokens were defined as a security by SEC after investigating the DAO attack that happened after the decentralized project had collected more than $150 m in ether. Some people may be tempted to say that the big difference between the two is that IPOs are regulated and therefore safer for investors. Whilst IPOs are heavily regulated, this is by no means a guarantee for investors. There have been countless IPOs that have been scams akin to the money laundering scams seen in the ICO market. For example, Russian and Chinese companies can easily list with no product presented.

3. Investors vs contributors

Commonly, only large investors can participate in IPO of a company, whereas there is nearly no entry barrier for anyone who wants to invest in a project that goes on ICO. In order for an IPO to sell shares and thus provide liquidity to existing shareholders, it must be listed on an exchange. There is close cooperation between exchanges and companies as a result. Think of AliBaba’s choice to list in NYC for example. ICOs in comparison are not obligated to list on any exchange in order to provide liquidity. Among companies going on ICO there are no players of the size of Amazon, and no Vanguard-like investors as well. In order to subscribe for an IPO an investor must be deemed as sophisticated. This is also where KYC (Know Your Customer) becomes relevant as this is used to prevent money laundering. In an ICO the investor is not known and there are no requirements on the investors sophistication. Anyone with an internet connection can participate in an ICO! ICO contributions usually begin with 0,1 ETH which equals approximately $30. However, the largest infrastructural ICO projects such as Status or Filecoin attracted solid sums of money from different investors.

4. Developing product vs developed product

The companies that have opted to go on IPO may be characterized as well-established company that has already launched a successful product and aims to raise more money for a product expansion. ICO doesn’t attract large reputable companies, but usually fintech startups – innovative companies, whose business is still nascent. It isn’t surprising if an ICO project doesn’t happen to have any working prototype and collects millions of dollars only with the idea described in a White Paper (a 15-25 pages document used to present the project’s idea and technical details).

5. Amount of money raised

The largest IPOs in history account for Chinese companies, with Alibaba leading the rank. Alibaba IPO in NYC in September 2014 raised approximately 21.77 bn USD. As for ICO, the most well-known case of successful initial coin offering is the creation of Ethereum cryptocurrency. In 2014 the company issued tokens for anyone willing to contribute, and in short time those tokens dramatically spiked in price. The company raised 18 M USD through ICO, and now the cryptocurrency capitalization is 4.6 bn USD. The record-high amount of money in ICO history was raised in 2016 – 210 M USD in total.

6. Number of IPOs and ICOs in summer 2017

In 2017, 86 companies have gone public, which is a 65% increase from last year. Meanwhile, the total capital raised by these IPOs grew 153% to 21.4 bn USD. The Wall Street Journal reports that 167 private companies (each valued at more than 1 bn USD) could be preparing to go public right now, and there are far too many crytocurrency ICO`s flooding the market. The largest of this summer ICO accounts for Status, a decentralized applications that run on the Ethereum Network. The sales of its token has risen to about 110 M USD with over 300,000 tokens sold.

7. Preparation time

Preparations for IPO usually take 2–3 years of hard work. Decision made, a company’s management must realize that sincere wish isn’t enough for going public. The company has to meet the market requirements. They have to make the ownership structure transparent, gain reputation as a reliable borrower, rise brand awareness – i.e. become recognizable in the market. In comparison, from the decision to ICO to actual launch there is only 2–5 months, As a rule, a startup raises money for 30–60 days. If the required sum is capped, developers get the money and fulfill their obligations. If not, the funds return to backers.

8. Costs

ICO initial costs can go anywhere from 150,000 – 500,000 USD with 300,000 USD being the average. Plus, it’s not uncommon for developers to receive a small portion of the amount raised, which is how they earn a majority of their profits. While one may get a little astonished at the costs, it’s notably less expensive than an IPO, which may cost well over 1 M USD and one has to give up equity in the company. The scope of IPO costs can vary significantly from offering to offering based on a number of variables, such as the size of the offering, the complexity of the IPO structure, and the organization’s readiness to be a public company. In a nutshell, the typical business company can spend more than 750,000 USD as direct costs related to the IPO.

Thus, despite the similarity of the names, IPO and ICO have some key differences that one should bare in mind. ICO seems alluring due to its crowdfunding nature and accessibility to almost anyone and is a perfect way to raise money for blockchain startups. IPO is strictly regulated that means that the investors are protected and it is a way to attract investment for already successful large companies. As usual, IPO raises more money, although the costs are higher as well. All things considered, ICO and IPO seem to occupy different niches and focus on different target audience – the future evidently lies in the parallel development of both models.


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