What is an ICO?
An ICO, or Initial Coin Offering, is a way of raising money by selling cryptocurrency tokens. The process is like an IPO – Initial Public Offering – in which a company issues shares to raise capital.
Setting up an entirely new blockchain is a complex undertaking, so many modern ICOs today are built on Ethereum, an existing cryptocurrency platform. Buyers pay with Ether, Bitcoin, or other coins, and a smart contract promises to pay them equivalent value once the new token is issued.
Ethereum itself was funded by an ICO in 2014. The platform raised $18M in 42 days, with buyers exchanging Bitcoins for Ether at a price of roughly $0.30 each. Since then ICOs have boomed, with EOS – a decentralised application infrastructure, raising $700M in 2017.
Since the tokens purchased in an ICO can be traded, the most successful ICOs have been popular with investors. Finding the right ICO can be an incredibly lucrative investment.
Not all ICOs are successful, however. The State of the Token Market report for 2017, from Fabric Ventures, found that 48% of ICOs failed to reach their target. Worse, many are outright scams, with ICO fundraisers disappearing without issuing anything to investors.
This is one of the reasons why the response to ICOs from regulators has been mixed. In the US, the Securities and Exchange Commission has moved towards regulating ICOs, arguing that they are effectively securities. Those ICOs that promise voting rights to investors or make guarantees based on future company earnings do indeed look like securities and this has made regulators take notice.
Regulators argue that they are protecting investors from scams. ICO supporters worry that regulators could stifle a creative new investment route by overzealous legislation. ICOs are already banned in China and South Korea. Switzerland, however, has adopted a positive stance towards cryptocurrencies in general.
Some other ICOs have effectively become a gimmick, with companies giving tokens away as a marketing exercise. Others sell them as a way to buy the right to use a service.
For all these reasons, it’s sensible for a potential ICO investor to do some research first. This is where CoinSchedule’s resources come into play. We have developed an algorithm that assigns a Trust Score to ICOs based on the information they provide. One important piece of information that we use in the Trust Score is the KYC (Know Your Customer) information, so we have a partner that can verify the identities of all ICO team members.
Names, photos, biographies and even ID verification for team members can help to show a trustworthy ICO, as can appropriate links to supporting material and websites.
Some ICOs add measures to help protect investors, such as holding funds in an Escrow account until the terms of the ICO are met, preventing the organisers from simply disappearing with the money.
The unregulated nature of ICOs does increase the risk involved in investing in them. However, it’s also the thing that has made them so agile and flexible. Done right, a good ICO is a great way to get funding for a project that has so far not had any luck in raising investment.