“Initial Coin Offering”, often abbreviated as ICO is an unregulated means of raising funds for a new cryptocurrency venture. ICO, also known as token sales or crowd sales, is mostly used by startups to evade the arduous & rigorous capital-raising process that is required by banks or capitalists.
How does ICO Campaigns Work for Startups?
If a new crypto venture wants to raise money through ICO, it needs to create a whitepaper with all the details about the project, the aim of the project, how much money would be required to undertake the venture, how many virtual tokens the project pioneers will keep, what type of money would be accepted and how long the campaign run for.
In the ICO campaign, participants buy distributed crypto coins/tokens by investing other digital assets or fiat money. If the funds raised, do not meet the minimum fund’s requirement by the startup, then the money is returned to the backers, and the startup is considered futile. But if the fund’s requirement is met within the time frame, then the money is used to initiate the project requirement as per the whitepaper.
Early investors are motivated to buy the crypto coins in the hope that after the launch the crypto coin/tok value would increase, thus proving beneficial. The Smart Contracts platform, Ethereum is a successful ICO project whose campaign was able to raise $18 million in Bitcoins. The project was initiated in 2015 and after a year, the market cap of Ether crossed over $1 billion.
ICO or Kickstarter?
Based in Brooklyn, Kickstarter is an American public-benefit corporation that manages a global crowdfunding platform for creative projects. Many experts say that ICO’s are similar to Kickstarter way of raising funds for a blockchain project. But there is something different about these two platforms.
Investors who invest in rewards based campaigns like Kickstarter can know the outcome of the project. A prototype that is already built allows these investors to compare the project with similar products and predict the potential success of the campaign. However, investors who invest in ICO campaign cannot forecast the outcome of the product. More precisely, the investment on a platform like Kickstarter is safe, as compared to any ICO campaign. There have been many instances where ICOs turned out to be scams and investors had to incur losses. So, people should be careful enough while choosing a campaign to invest.
The good part is that most of the ICOs these days are conducted with a minimum viable product so that investors can understand and become aware of the product entirely. A proper understanding always facilitates to wisely decide whether to risk the money or not.
Nevertheless, in many countries like the USA, SEC (Securities & Exchange Commission) has implemented regulations. As per these laws, the ICO will have to provide a fair and lawful investment opportunity. Additionally, it will open doors for investors from all around the world, as these coins can be obtained using any currency.
Risks with ICO’s
Although there have been successful ICO transactions on the records, they are also considered to be the most disruptive innovative tools of the digital age. Bitconnect and Produem have been some major cryptocurrency scams that have been trolling in the market.
Bitconnect was an Indonesian company that ceased to operate and turned out to be a Ponzi scheme, where thousands of people faced losses. This open source Bitcoin based cryptocurrency became very successful until the beginning of 2018, when the exchange collapsed and left multiple investors to suffer.
Prodeum was another cryptocurrency startup that appeared online, and after four days, it just vanished. The platform asked investors to help raise nearly 5400 Ether for them to build a database of fruits and vegetables on Ethereum blockchain. After collecting, less than the price of two Chipotle burritos, the platform went missing, and the website was replaced by some junky words.
Therefore, being an investor, you should be cautious as some ICO or crowd sales may be fraudulent. These fundraising campaigns are not regulated by any financial authority like Security Exchange Commission. So, if in case you tend to lose funds in a fraud campaign, you may not be able to recover it ever.