Initial Coin Offerings (ICOs) have quite literally dominated the business scene in 2017. Prior to this year, not many people outside of the core cryptocurrency and blockchain technology community had heard about ICOs but they have now become a popular topic of discussion across many diverse business segments. This increased level of interest being directed at ICOs is due in no small fact to the billions of dollars that have been raised by these campaigns. In previous years, ICOs barely registered a blip on the financial scene but in 2017, this year, the story has been completely different with record-breaking capital generation figures running into billions of dollars.
An ICO is a crowdfunding process in which a startup issues digital cryptocurrency tokens to investors in exchange for money in order to establish the startup enterprise. By investing in the ICO, an individual becomes an early adopter of the technology solution being developed by the startup. These tokens purchased during an ICO can be spent on specific items within the ecosystem of the startup or traded for Bitcoin and Ether when the startup comes online.
Unlike in the case of IPOs and other venture capital fundraising means, the entrepreneurs do not put up equity. This means that investing in an ICO does not give investors a share of the company and as such, they will not have ownership rights to future profits.
The first ever ICO was held in 2013 by Mastercoin which raised $500,000. It was essentially a P2P campaign and it used the Bitcoin blockchain framework. The next notable entry was Ethereum in 2014, which generated $18 Million in Bitcoin. This was the last notable ICO to be run using the Bitcoin blockchain protocol.
The emergence of Ethereum significantly accelerated the ICO process. The smart contract protocol of the Ethereum blockchain meant it was no longer necessary to create complex protocol layering on top of the Bitcoin blockchain. Developers could create custom smart contracts straight from Ethereum. This greatly simplified the ICO process and has led to the proliferation of numerous ICO campaigns.
In 2015, ICOs were still a relatively unknown concept and they raised a total of approximately $240 Million which was a small percentage of the over $34 Billion in crowdfunding for the year. It wasn’t until 2016 that ICOs began to capture the imagination with the DAO project raising $150 Million.
In 2017, ICOs have firmly established themselves as the principal crowdfunding means for blockchain-based startups. By the middle of 2017, over $1.27 Billion had been raised by ICOs. At the end of November, ICOs had raised $2.3 Billion and experts predict that it will cross the $3 Billion mark by the end of the year.
A startup wishing to conduct an ICO campaign typically writes a white paper that serves as the marketing document for the concept. This document explains the technical architecture of the technology, puts forward the token implementation plan, and gives a roadmap for the development of the technology. It also details the key value proposition(s) of the technology.
Working typically on the Ethereum platform, the startup creates a token which will be the cryptocurrency sold to investors during the ICO campaign. A website is created for the campaign which houses the white paper, promotional videos, important news as well as team member profiles.
Extensive marketing of the ICO is required to achieve optimal market penetration. Social media, digital platforms, cryptocurrency channels, and cryptocurrency news sites are just some of the marketing channels that are employed to publicize the token sale.
During the token sale, investors log on to ICO website and buy tokens using fiat currency, Bitcoin, or ETH depending on the preference of the startup company. After the ICO, the tokens are then listed on numerous cryptocurrency exchanges and the money raised is used to develop the project.
Perhaps the biggest impact of ICOs on the business scene is the way in which startups are funded. There has been a remarkable shift from IPOs and other more traditional venture capital models to the ICO model. This has remarkable implications in terms of liquidity and growth capital. There is also an apparent shifting of focus from equity holders to token holders.
Due to the meteoric rise of Bitcoin and ETH, many people are actively seeking to become early adopters of the next big thing in the cryptocurrency world. This plays right into the hype surrounding ICOs and helps to feed the investor frenzy. Startups literally bolt a cryptocurrency token to their business model and sell it to investors.
On the flip side, ICOs have also made it a lot easier for a number of entrepreneurs to secure funding for their projects. The stringent regulatory and statutory measures required for venture capital fundraising has made it difficult for many promising projects to see the light of day. With ICOs, entrepreneurs can go straight to everyday people and convince them to put up money in their ideas and concepts.
One of the drawbacks that have been identified in the ICO model has been the lack of adequate regulation. With the figures being posted by ICOs, it became necessary to introduce some level of regulatory framework into the system.
One of the thorny issues in the space has been the assertion by some financial experts that some of the tokens being sold as utility tokens are actually securities which would mean that they come under the purview of securities law. The SEC agreed with this and issued a ruling on the matter. Since then, there has been a much stricter observance being paid to ICO campaigns. In countries like Japan and Singapore, the Government has taken steps to introduce a regulatory framework that protects investors from fraudulent ICO campaigns.
There is no denying in the fact that ICOs have greatly affected the business process. Billions of dollars have been raised and many innovative technological solutions are being developed. There are, however, numerous pump and dump schemes run by startups with mediocre economic value. With the help of adequate regulatory framework, the ICO landscape can be sanitized ensuring that investors are protected from unscrupulous individuals.