IPO vs. ICO

With the development of blockchain technology and the rise of cryptocurrency use, our community is facing the brand-new option of investing in promising projects and startups: Initial Coin Offerings (ICOs). An ICO is one of the best ways to run a crowdfunding campaign for blockchain-based projects in order to raise sufficient funds for product or service development. Initial Public Offerings (IPOs), on the other hand, have been a way to provide investors with shares from future business development since the 18th century. This type of investment option is much older, and has a range of advantages, as well.

Whereas an initial coin offering is the process of attracting thousands of people to purchase company tokens for project development, an initial public offering is the process of selling shares to a particular set of investors. An IPO requires a developed product prototype, while for an ICO, it is enough just to have a promising idea.

Below, we’ll discuss the major IPO and ICO differences and highlight their pros and cons.

ICO vs. IPO: Definition and Purpose of Launch

An ICO functions as an independent mechanism to raise funds for a new and promising idea. These funds are later exchanged for cryptocurrency units (ETH, BTC, LTC, etc.) and used within the project. The general idea of an ICO launch is to raise investor funds in order to support startup development, store them, and further distribute them between token holders. With coin supply management and regulation, all participants (developers, investors, and supporters) mutually benefit in terms of profit.

How Does an ICO Work?

An IPO is a stock-market launch during which investors can purchase shares of a company. IPOs are usually launched to raise equity capital, monetize private shareholder investments, or enable easy trade of holdings. This process is commonly performed via investment banks, which means that the process of an IPO is more centralized and governmentally controlled. Funds collected during an IPO are considered to be donations, as the dividends are offered in terms of profit.

In addition, IPOs are provided with VC (venture capital) if their companies are new or intend to implement modern, experimental technologies. Their entrepreneurs should be highly professional, and possess technical experience and qualifications. One important aspect is that IPOs collect donations and investments, as they have a low chance of raising sufficient funds through an ICO, for instance. Without decent support, they wouldn’t get the opportunity to succeed in the modern market.

How Does an IPO Work?

The main difference between these crowdfunding models is the way a project is carried out. ICOs are usually run in the beginning of a project, and offer a detailed plan of project development as well as milestones. IPOs, in contrast, are commonly run when the company has already been developed and is stable, with a proof of concept and ready-to-try-out product version.  

Therefore, ICOs aim to:

• raise funds in order to create a product

Whereas IPOs aim to:

• suggest new ways of increasing existing capital
• offer company investors more liquidity
• enable the trade of existing holdings

ICO vs. IPO Market Analysis

According to CoinDesk data evaluation, ICOs have managed to collect more funds in the first three months of 2018 than in the whole previous year. Reaching $6.3 billion in 2018, the funding of initial coin offerings equals 118% of the previous year’s total. Moreover, the number of ICOs conducted equals 59% of the previous year’s total.

It is important to stress that $1.7 billion out of $6.3 billion belongs to the Telegram token sale. Its record-breaking activity is illustrated in comparison with other projects in the graph below:

Speaking of IPO fundraising, venture capital dollar volume increased by $16.59 billion from the first quarter of 2017 to the first quarter of 2018. An interesting fact is that the number of deals stayed in the same diapason (338-339).

The second part of 2017 appeared to be good for IPO campaigns run by technical projects. The first quarter of 2018 continues in the same rhythm.

Consider these prominent technical IPOs from the first quarter of 2018:

According to market data, it is obvious that both ICOs and IPOs are experiencing growth and development. This means that one model doesn’t fully dominate the other. The difference is that each fundraising option is meant for different purposes.

With this in mind, let’s highlight other distinctive features of ICOs and IPOs.

Requirements

IPOs

Before offering stocks and shares via an IPO, a company must prove that it has:

• an earnings threshold and assured financial projections
• a positive track record and audit history
• a prospectus (legal document declaring the intention to issue shares)

In addition, it is important to follow these criteria:

• evaluate market demand/supply dynamics
• understand potential clients’ needs and behavior
• demonstrate traction
• prove your compatibility
• evaluate competitor behavior and provide a unique approach

The following industries attract the highest number of investors:

All investors must comply with legal procedures in order to contribute to the project.

ICOs

The beneficial point of an ICO launch is that the project does not necessarily have to comply with regulatory frameworks.

When launching an ICO, the project has to provide a well-thought-through white paper highlighting:

• the project idea
• technical structure and architecture
• token-economics details
• project roadmap and milestones

The only thing an investor has to consider is whether he or she is willing to contribute. For this, one must have internet access in order to purchase company tokens.

How Are Profits Earned?

During an IPO, investors acquire stocks representing ownership rights and percentage of profit from future company earnings. In addition, stockholders receive annual dividends according to the company’s progress. It is also possible to invest at the early stage and profit from increased stock value.

During an ICO, one should keep in mind that purchased coins do not provide ownership rights. A coin can be bought at a lower price and then increase in value depending upon demand. It can have a fixed price, but there can exist various discounts at various project stages. All of this information must be provided in the project’s white paper. Investors should make sure to go through it before purchasing any tokens/coins.

Having discussed the major working principles, we are now ready to highlight the pros and cons of each crowdfunding model:

There is also the novelty of the STO, which is basically an offering of tokenized securities that can potentially provide ownership of a project. This is similar to an IPO, but with fewer legal and financial requirements. This places it between ICOs, with returns in token-price growth, and IPOs, with returns in the form of dividends and equity-valuation growth.

Conclusion

In conclusion, it should be noted that ICOs work best as a crowdfunding model for blockchain-based projects. IPOs help companies provide greater liquidity to their stocks. Though IPOs require more legal activity and ICOs aren’t considered totally safe due to the absence of restrictions, cases vary. Even an IPO can fail and become bankrupt, but a number of ICOs are currently offering promising and profitable deals. Thus, one should precisely investigate investment options in order to make the right choice.