ICO: the modern way to fund a project
Contents · 9 sections
ICO: an innovative way to fund a future project
Applying to investment funds and accelerators to fund an innovative idea can be a very slow process. Crowdfunding platforms such as Kickstarter and Indiegogo are an alternative, but they do not give backers a share in the company, and their fees are not small. Kickstarter takes 5% from projects that reach their goal, while Indiegogo offers flexible funding: it takes only 4% of the total of each successful campaign, but if a project misses its goal, it is charged 9% of the amount raised. Both also charge card and PayPal processing fees, which range from 3% to 5%. These numbers push founders to look for other ways to fund a project.
In recent years the newest and most talked-about method has been the ICO. ICOs grew quickly alongside cryptocurrencies and blockchain technology and have become the main way to fund many innovative projects.
What is an ICO?
It is an unregulated way to raise money. ICO stands for initial coin offering. A company offers coins or tokens in exchange for other tokens or cryptocurrencies, most often Bitcoin and Ethereum. ICO tokens are not physical; you get them in exchange for fiat money (legal tender) or other cryptocurrencies. They work like a voucher you can use or exchange for goods or services on a particular platform. In most cases a company creates its own cryptocurrency to use in its business and looks for buyers to fund its ideas and projects. Both sides benefit. Investors, however, get nothing more than the digital asset: no share of the company and no vote in future decisions. At the same time, anyone willing to spend money on tokens can be an investor. This is where investors need to think hard about whether they can win or whether the risk of losing is greater.
A good investment opportunity (with a big risk)
"Is it worth putting money into an ICO?"
A good investment in an ICO project depends largely on whether you have done your homework. Look up the company, what it does, the team and its expertise. Check whether you can contact the team, whether there is a blog that answers your questions and whether they have delivered projects before. These are signs of a real company that may be worth investing in. But here comes the risk. Investing in an ICO is not always profitable. Some ICO projects have no real product or proven business model. Plenty of people take advantage of this: they float an idea just to raise money fast and mislead investors into funding a project or product that does not exist. That is one of the biggest risks: putting money into something you are not sure exists or will ever be built.
How is an ICO different from a public share offering?
When people started talking about ICO projects, they immediately compared them to an IPO (initial public offering). There are important differences between the two.
An IPO is an exit strategy and usually happens when a company is financially stable. An ICO is an entry strategy, used by new companies to raise money for their project and enter the market. Access is the other main difference. IPO shares often go only to institutional investors such as investment banks and mutual funds. If you are not in the "big boys' club", getting IPO shares is much harder.
Literally anyone can take part in an ICO. All you need is some Bitcoin or Ethereum to exchange for the tokens. This levels the playing field and breaks the "oligarchic" nature of traditional fundraising, letting ordinary people take part in investments that could bring them short-term gains.
Another difference is ownership. Shares bought in an IPO represent a stake in the company's future income. Buying ICO coins gives you no ownership of the project. You get neither shares nor a say in decisions.
The main and most important difference between an IPO and an ICO is regulation. Companies doing an IPO must register with the regulator and publish a legal document called a prospectus. This way they meet certain standards and operate legally.
ICOs are not bound by a legal document. They usually publish a whitepaper that explains everything about the project and its goal, but even that is not required.
How an ICO is created and launched
Before going further, you need to know what tokens are. They are virtual crypto coins that investors buy with fiat or digital currencies. Before buying them, investors should understand the ICO itself.
When a company has an idea for a project, it starts looking for investors. They study the project's concept, which has to be explained in detail: what exactly the idea is, what the goals are, how much capital it needs and what it will do once it is finished. Once the idea is agreed internally, it is presented to the market to find enthusiasts and supporters. That is how an ICO works, and it keeps gaining popularity and followers.
Examples of successful ICOs
The list of successful ICOs is led by Brickblock, a smart contract platform that lets you sell and invest in real estate on the blockchain. Brickblock launched in May 2017, and in August, in just 5 days, more than 800 investors put in a total of 1 million dollars.
Deedcoin argues that 6% of your house does not belong to you but to your future real estate agent. Homeowners in the US hold 15 trillion dollars in private property and stand to lose 900 billion dollars in future commissions. Deedcoin's technology aims to decentralise and streamline the real estate industry, returning up to 750 billion dollars to homeowners by tokenising real estate commissions and connecting clients and agents directly.
NWP, based in Estonia, is building an ecosystem for intelligent healthcare and is holding an ICO for a revolutionary healthcare project. Overall, the company aims to raise 20 million US dollars in the token sale.
There are many examples of successful ICO campaigns, but just as many aim only to pump the price quickly and profit at investors' expense.
The dark side of ICOs: scams and a high share of projects that never happen
As with many other money-making ideas, there are unscrupulous people ready to take advantage of naive investors. Their goal is to make as much as possible, as fast as possible, at any cost. Recent studies show that 80% of ICOs are scams and only 8% have a promising future. These studies only cover large projects with a capitalisation of 50 million dollars or more. If smaller companies were included, the share would probably be even higher.
A few signs can tell you that an ICO is a scam:
- Promises that are too good. If you see an ICO with claims like "Our coin has grown 1000%!", be careful. If something looks too good to be true, it probably is. Such astronomical growth rates are rarely sustainable in the long run.
- A weak online presence. One of the main things to check is the people behind the project. Look up every team member in detail and make sure they really exist.
- A vague whitepaper. To create an ICO, the team should publish a whitepaper that describes the project's ideas and goals. If the future plans are only sketched out, you are most likely looking at a scam.
Examples of big scams
Scams are becoming more common in the ICO world. Recently the LoopX ICO led to a loss of more than 4.5 million dollars of investor money after its creators replaced the original legal documents with fake ones.
Many of these scams work like multi-level marketing or pyramid schemes, such as OneCoin, which took 350 million dollars from investors and ended with the arrest of its creators.
The Card ICO empire, for example, was caught using the image of French actress Sabine de Poncins as the platform's CEO, under the name "Patricia Harrison".
There are countless other examples of fraudulent ICOs. In the end, common sense is the best protection. Do not be swayed by high returns and impossibly short timelines, and research carefully before you invest.
Regulation
Opinions about ICOs vary widely, both negative and positive, and this has led several countries to take regulation seriously. Here are some examples:
Europe
November 2017: the European Securities and Markets Authority published two statements on ICOs. The first warned investors about the risks of investing in ICOs. The second warned companies involved in ICOs to comply with the regulatory obligations and licences that may apply to them, including the Prospectus Directive, the Markets in Financial Instruments Directive, the Alternative Investment Fund Managers Directive and the Fourth Anti-Money Laundering Directive.
United Kingdom
April 2017: the FCA (Financial Conduct Authority) published a discussion paper on the use of blockchain technology. It said that ICOs can resemble an IPO or a private placement of securities. The FCA runs a regulatory sandbox that lets companies test innovative products and services without full prior licensing, and according to the FCA this framework may suit some ICOs.
China
September 2017: Chinese regulators banned individuals and companies from raising money through ICOs and from providing cryptocurrency trading services. They also recommended that the authorities investigate 60 specific trading platforms that enabled ICO fundraising.
Overall, the concept of the initial coin offering is still at an early stage. With the rapid progress of blockchain technology, we can be sure of more innovation in the future. At the same time, ICOs may become subject to rules set by governments and by the network itself. For now, the industry looks fairly positive about the future of ICOs. Keep in mind that this market carries significant risks, and only people with good knowledge of the crypto market are likely to do well in it.
Petar Dyaksov
Entrepreneur, investor and managing partner at SEOMAX, with more than 15 years of experience in e-commerce and digital marketing. He builds businesses in technology and e-commerce, invests in companies and supports entrepreneurs. Speaker, trainer and mentor at dozens of conferences, seminars and entrepreneurship programmes.
More about me
