Recent times saw a rise of popularity of the new method to attract investment, Initial Coin Offering (ICO). The Wall Street Journal reported that just in the third quarter of 2017 ICO helped companies raise a record USD 1.32 billion. Vedomosti explained how ICO works and we offer the most noteworthy excerpts from the article.

What is ICO?

ICO allows startups to attract funds, bypassing traditional capital markets. It could be described as a mix of Initial Public Offerings (IPO) and crowdfunding.

During ICO, the company offers investors so-called tokens, which are the company’s own cryptocurrency created on a famous blockchain platform (for instance, Ethereum). Having purchased the tokens, investors become owners of the company’s cryptocurrency and can use it to buy their products or services.

Who runs ICO?

ICO is mostly run by IT companies, especially those that work with cryptocurrencies. Therefore, people from other areas find it difficult to understand what exactly these companies do. There are some exceptions. For instance, Paquarium raised USD 620,000 for construction of a giant aquarium, and Russian farm business Kolionovo Ecosystem raised USD 500,000 for development.

Participation in ICO requires owning cryptocurrency (bitcoin, ethereum) and an e-wallet. Usually companies run ICOs on their own websites and the conditions for placement vary. You can buy tokens in the secondary market, but they might have high volatility and low liquidity there.

To organize an ICO, you need correct codes, a history that can attract investors, and a little bit of luck. From the business point of view, you also want to have a finished product and solid plans for realizing it so as to avoid giving the investors the gate.

How do you spot the difference between legal ICO and fraud?

The most evident sign is information: the less data you’re provided, the higher the chance of fraud. You need to find out who owns the startup, and if the startup has finished products and legal consultants. Loud statements about “support from a large sovereign investment fund” without concrete information are a reason for concern.

How is ICO regulated?

China and South Korea authorities recently banned ICO. The U.S. Securities and Exchange Commission stated in July that most ICOs must be regulated according to the law on securities. Ministry of Finance of Russia is to prepare a law on cryptocurrency until the end of the year, although the country’s Central Bank spoke against making cryptocurrency a money equivalent.

Statistics

Token Report informed that 172 ICOs have been run since the beginning of the year, raising total USD 2.27bn. InterPlanetary File System creator Protocol Labs ran the biggest ICO that attracted investment worth USD 262 million. Before that DAO venture capital fund ran an ICO that raised a record USD 152m, but hackers stole one third of that money.

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