With the rapidly growing number of companies with Initial Coin Offerings (ICOs) and the notion that the ICOs will soon replace the IPOs, we decided to cover these two topics by explaining their processes and to compare them with each other.
Lets start with the ICOs.
In simple words ICOs raise funds for a new cyptocurrency venture. They are a new form of crowdfunding that is not regulated. So basically anyone can start an ICO, even though this is worrying the regulators, there has been a tremendous growth in the number of companies (mostly startups) which held ICOs, and the amount they raise has an outstanding growth.
So how many types of ICOs are there?
There are two types of ICOs, currency based ICOs and project based ICOs. A currency ICO is when companies introduce in a new currency system. The companies will start giving out tokens which become new cryptocurrencies in exchange of the older and more established coins such as Bitcoin and Ethereum. The reason why people are drawn to these ICOs are that of investment opportunities. One of the best examples of these kinds of ICOs is the Ethereum ICO.
On the other hand we have the project ICOs which issue “work tokens”. When investors buy these tokens in the crowd sale. This type tokens will give the holders certain rights and votes inside the environment of the decentralized application itself. One of the most famous, and consequently, infamous examples of this kind of ICO is the DAO.
Now let’s move on how does an ICO work!
A good ICO should start with a project, and the idea and the team behind this project will determine how trustworthy the ICO holder is, this is the basics of a successful ICO and mentioned in almost every discussions about ICOs.
Now, the ICO company needs to create the tokens which they are going to exchange for Bitcoin or ETH in the token sale. There are multiple ways to create tokens, one way is to create tokens through Ethereum. Ethereum provides a platform which uses the Blockchain technology to create currency and also to make decentralized applications as well. ICOs usually use two types of tokens, usage tokens or work tokens. Usage tokens acts just like a native currency in their environment and can be exchanged for other tokens or FIAT money. Work tokens does not necessarily act as a currency, work token holders will receive various rights within their native environment, for example right to vote for a particular change within the network.
For Ethereum created tokens, ERC20 makes sure the token created meets the standards. ERC20 check the following 4 activities:
- Get the overall token supply
- Get the overall account balance
- How does the transfer of tokens from one account to another happens
- Approve the use of the token as a monetary asset
After tokens are created firms should then start evaluating market and see how their ideas of the project and the mechanism of their cryptocurrency would work in the market.
Then comes one of the most important parts of an ICO and that is the whitepaper. Some refer to the ICO’s whitepaper as only a document and has no value to gain trust over a firm’s ICO, but that’s not entirely true! of course whitepaper should not be the only factor of choosing an ICO to invest, but a well-technically written whitepaper with details about the project and the business model of that project and the company, including a nicely structured and specified mission and visions, will certainly make a difference.
Lets call all the previous stages as a sort of an internal and conceptual processes, because from this point on its all about PR and marketing. An ICO without a strong marketing strategy is like Ferrari without tires, its fabulous but it will get to nowhere. The announcement of the ICO is also a very crucial step, firms must choose the most suitable channels, target their potential customer and campaign it flawlessly, the competition is too high. For more reliability, a widely common practice is that, ICOs cooperate with advisers who are among well known technologists and field experts to advise them throughout the ICO process.
ICOs onboard new investors via online portals, which could be available through various channels, such as web, mobile, tablet and etc. An ICO portal consists of three important parts. First is the investors registration and onboarding. The investors’ registration is processed by a registration form which investors provide their personal information and the ICO holder can ask for their requirements. Second part of the ICO portal is the investors dashboard. Through the investors’ dashboard users can process their token/FIAT contributions to the ICO, process KYC and etc. The third section belongs to back office management, ICO staff will manage the contributions, manage investors and their KYC and etc.
Once the ICO time has ended firms will start distributing their coins to the investors.
Initial public offering is the process in which a private company can go public by sale of its stocks to general public. such private company could be a new, young company or an old company which decides to be listed on an exchange and hence goes public. A company offering its shares to the public is not obligated to compensate the capital to it’s public investors. The company which offers its shares, known as an ‘issuer’, does so with the help of investment banks. After IPO, the company’s shares are traded in an open market and exchanges. Those shares can be further sold by investors through secondary market trading.
Now lets see the process of an IPO
IPOs start with hiring an investment bank. A company seeks guidance from a team of under-writers or investment banks to start the process of IPO. The team will study the company’s current financial situation, work with their assets and liabilities and then they plan to cater to the financial needs. An underwriting agreement will be signed which will have all the details of the deal and the amount that will be raised, the securities that will be issued. Though the under-writers assure on the capital they will raise, they won’t make promises. Even the investment banks will not shoulder all the risks involved in the money movement.
later, the IPO holders should register and comply with the regularities.The under-writers and the company holding the IPO together file the registration statement which constitute for every fiscal data and business plans that the company has. They must also declare how the company is going to utilize the funds it raises from the IPO and about also the securities of public investment.
The next major step is to advertise the IPO. Company’s executives during this time will attend conferences to inform the community and the public that they will be having an IPO. This step is a really important step since right marketing strategy is an essential for a successful IPO.
The fourth step of an IPO process is the price determination. Based on whether company wants to float a fixed price IPO or Book Building Issue, the price or price band is fixed. A fixed price IPO will have a fixed price in the order document, and the book building issue will have a price band within which an investor can bid. Number of shares that will be sold is decided. The Company should also decide the stock exchange where it be going to list their shares.
On a planned date, the prospectus and application forms are made available to public online and offline. People can get a form from any designated banks or broker firms.
After the IPO price is finalized, the stakeholders and under-writers work together to decide how many shares will every investor receive. Investors will usually get full securities unless it is oversubscribed. The shares are credited to their account. The refund is given if the shares are oversubscribed. Once the securities are allotted, the stock market will start trading the Company’s IPO.
ICOs vs IPOs
According to data from Renaissance Capital, 2017 is on track to be the second least active IPO year in the last eight. Taking into account 2016 was one of the worst year for IPOs in decades, 2017 had only 59% growth in the number of IPOs hold. On the contrary ICOs have had a dramatic growth rate compared to 2016. Number of ICOs hold in 2016 was around 46 as in 2017 there were around 222 of them, making the growth rate up to 3,590% in one year. So lets find out why ICOs are strongly preferred over IPOs now:
Lower transaction costs:
When you transact in cryptocurrency, the cost is minimal – practically free when trading directly between individuals, and around 0.1-0.3% when trading on a centralized cryptocurrency exchange. In contrast, transacting in stocks can be expensive – brokers typically charge between $10 to $50, or a percentage of the purchase price which can be as high as 1%. And if you want to buy shares listed on an overseas exchange via your local broker, the cost is even higher.
Cryptocurrency exchanges are open 24/7. In contrast, stock exchanges have very limited opening hours. For example, the London Stock Exchange is only open 08:00 to 16:30 weekdays.
Cryptocurrency transfers settle in minutes. In contrast, stock exchanges typically settle in one or two business days.
Immutable and public audit trail
With blockchain technologies, the audit trail of transactions is public for anyone to see. This greatly reduces errors and potential for disputes. In contrast, when you purchase shares on a stock exchange, there is no public audit trail that you can easily query and check your transaction.
ICOs are international – subject to local regulatory restrictions, blockchain technologies are accessible to any investor, no matter where they live. In contrast, a company doing an IPO on, say, the London Stock Exchange, will typically raise funds mainly from UK investors.
Faster and cheaper fund transfers
Funding a cryptocurrency exchange account – with Bitcoin or Ether, for example – costs very little, and settles in minutes, or at most hours. In contrast, funding your account with a traditional broker requires a bank transfer, which can be expensive and slow. International transfers using the SWIFT network can cost $40 for a single transfer, and can take days to arrive.
Trading venue flexibility
ERC20 tokens are based on a standard protocol and can be easily listed on a number of cryptocurrency exchanges (and transferred between exchanges) without any complications or costs. In contrast, a company listed on one stock exchange will see its shares only traded on that exchange.
The bottom line
With the convenience ICOs has brought to crowdfunding procedure, more and more investors and companies go towards them. But that’s not only it, the new cutting edge technologies and project introduced in Blockhain in ICOs are very tempting and exciting for investors to be part of. Will IPOs will disappear, probably not, will ICOs surpass IPOs, probably yes.
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