Think about all the companies that surround us, have you ever wondered how they started? From a couple of university friends who started with computer boards in a garage and turning it into Apple, to other tech giants such as Google, auto manufacturers or even sporting goods makers, how did these firms find funding to get started? Sure, some of these young entrepreneurs received support in the form of money from family members, others from Venture Capitalists, many eventually raising funds via methods such as Initial Public Offerings (IPO). These fundraising methods allow the investor to own an equity stake in the company. This means you buy shares and you own a small part or a small slice of the company.
Unlike other fundraising methods such as IPOs or Venture Capital, the buyer of Initial Coin Offerings (ICO) the investor does not get an equity stake in the company. The ICO implies that the coin can be used on a product that is eventually created. But it is important to note that the digital token purchased can appreciate in value and then sold or traded for profit. In short, over the past year-and-a-half, the initial coin offering method has been used often to start new firms in various industries. In 2017, the ICO method raised $3.8 billion dollars in total. But according to CoinSchedule, a data website, in 2018, by July, the total raised by the ICO method exceeds $12.0 billion.
This concept becomes easy. Let`s say that you want to set up a new company that sells viewing access to major sporting events. Instead of issuing shares or stocks, you can sell a digital token to a group of investors. And you call the new coin, SportCoin, but this transaction like most tokens, does not allow the buyer ownership of the company. You can trade these coins for other coins such as Bitcoin or for exclusive access to videos on the sports channel. When coin holders do not have an equity stake in your new company, it allow you and other board members to control the future of said company. But why do people buy?
To encourage investors to buy in your ICO, you will need to write a White Paper outlining your business plan then travel the global meeting potential investors to convince them that your new idea for this new company is novel and a potential money maker. Some ICOs get support from famous actors and athletes.
One of the most successful ICOs of all time was Ethereum Project and in 2014, it sold 60 million ether coins and raised capital of 31,000 bitcoin (about $18 million in fiat currency) and is now the world`s second largest cryptocurrency.
Now cryptocurrencies are underpinned by blockchain technology which is why ICOs were originally used, for the most part, by blockchain start-ups. However, there are many other new companies using ICOs to raise funds, despite not having a need nor any interest to utilize blockchain. Also, ICOs are not only used for start-ups. Privately owned companies with a wide range of users – some being popular apps – can use ICOs to raise capital. The ICO is a flexible tool, and saves one from the expensive costs of a third party or bank that charges a hefty rate for issuing IPOs for example.
ICOs are banned in most countries here in Asia, but in Singapore they are often used. Of course ICOs are used in Russia and the United States. The key issue now is how do regulators control these new products? The problem is that fraud is common in the crypto-world. Some founders actually disappear with funds raised. Recent estimates suggest that as many as 70 percent of ICOs are fraud-based and this of course has global regulators spending massive resources to bring this market under control.
More on ICOs later in this series…..