In order to successfully use all the proposed mechanisms and tools, such as ICO and IPO in the implementation of financial transactions, it is important for the novice investor to understand their features and differences, as well as the ways of use and purpose.
In this article, we will consider the differences between ICO and IPO, not only in content, but according to the characteristics of the assets presented. Knowing all the features,
will be easier to determine the choice of a particular trading / exchange strategy.
Description of the ICO
Initial Coin Offering (ICO) - often also known as "crowdsale" - is a process that is inseparable from the development of the digital currency market.
It is a form of investment raising in the form of the sale of a fixed number of new cryptocurrency units to investors, which are obtained by a one-time or accelerated issuance. There is also a form of "initial token offerings," i.e., "initial coin offerings.
The process involves the usual exchange of cryptocurrency for tokens, i.e., the type of cryptocurrency that is designated within a particular project. This can be the reference digital currency Bitcoin or any altcoins, including smart contracts. The latter option is analogous to stock market stocks, which are engaged in the issuance of startups. Its purpose: to raise funds for the development of their projects.
As for tokens, they do not have functionality as, for example, stocks. For example, tokens can often be used to get certain types of services, products from the issuer, a contract. It is also possible to use them in trading for currencies such as fiat or crypto. The price of a token is set according to the demand for the company's services or products.
To create their ICOs, startups prepare documents, calling them "white papers", in which they specify such criteria:
- project goals (main and intermediate);
- main features of the project;
- the amount of tokens (the exact number of tokens) that are planned to be issued;
- the number of assets that the founders intend to keep for themselves.
Description of the IPO
Initial Public Offering (IPO) - the first public sale of shares by a JSC (joint stock company), i.e. securities (shares, warrants, futures, bonds, etc.) are offered to the public for the first time. In other words, it is a change in the form of ownership of the company, its transformation from a closed form to an open form. Trading can be conducted as a sale of depositary receipts for shares. The buyers can be an unlimited number of persons.
As a result of the IPO, the following objectives are achieved:
- the company receives the necessary funds,
- investors are given access to participate in the development of the enterprise with the subsequent receipt of profits.
Investors receive a prospectus containing information on the company (structure, management, business plan), which is offered for sale for the first time.
Differences between ICO and IPO
The fundamental similarity between an ICO and an IPO lies in the key objective - to raise investment capital, which will serve as the financial basis for the development of the declared projects. The projects can be projects of different sizes (small blockchain start-ups, large established companies).
Both instruments are types of fundraising, i.e. funds are raised from third-party sources. Subsequently, tokens and shares can be used as a speculative instrument in exchange trading. In other words, assets can be sold at a profit if the project has become successful and the securities have risen in value compared to the purchase price level.
In ICOs and IPOs, projects with innovations useful for users, and especially exclusive projects, which have no analogues and competitors, are the most attractive for investors.
At first glance, the methods and goals seem similar, but on closer examination, they cannot be called identical.
This tool is for experienced market participants, such as a venture capital fund. An IPO is appropriate if the company has a stable business and a positive reputation in the chosen niche. Despite the scale and popularity, the organizers of IPO are often companies that also need money to realize their goals.
In an IPO, the investor is interested in direct participation and dividends,
Investing in an IPO requires special knowledge, i.e. investors must carefully study information (about issuers), analyze the prospects of the event.
Means of attracting investors' money during IPO - the shares which the company offers for sale on the stock market.
As in the case of the ICO, income in the form of dividends is brought by the shares, the price of which increases, i.e. if the project becomes successful.
The purpose of the ICO is the issuance of cryptocurrency for the purchase of the product to be created. At the same time, the issue of shareholder rights is of secondary importance.
Investors in ICOs are interested in multiplying the invested funds.
Organization and conduct of ICO is available to any market participant (individual, organization, company). The main thing is to have the capital, no special knowledge is needed. The key factor in projects - trust.
During the ICO capital is raised through the sale of the project's internal cryptocurrency (tokens).
The procedure is as follows:
The investor buys tokens. The funds that were raised in this way are invested by the developers in the implementation of the ideas declared at the start of the project. When buying tokens, investors count on the future success of the project, as a result of which the value of tokens will rise, and the price difference will provide a good (often, gigantic) profit.
! It's important to remember:
- ICO tokens are currency that investors can use as a means of payment (if the project is successful);
- IPO shares are securities that cannot be used as a means of payment.
IPO and ICO: benefits and risks
If we talk about the positive and negative sides of each instrument, they are also different.
The issuer has no right to uncontrolled expenditure of the income generated by the IPO. In the case of bankruptcy, the shareholders have the right to claim a share of the company's assets.
Formally, the investor in the IPO can participate in the management of the company.
When using the ICO instrument, the investor in fact acquires the rights to use the product, but has no influence on the project activities, as well as on the spending of the proceeds received by the issuers.
This suggests higher risks when using the ICO tool. However, there is a chance of getting a larger profit than the IPO-investment can bring.
If we compare pricing, then: the value of ICO tokens is usually lower than the price of IPO shares.
This means that tokens can have a lower value, e.g. less than a dollar, while a stock can be valued at several tens of dollars.
A blockchain ICO project is usually not a profit-making company. It is important to understand that a token is a cryptocurrency that is based on the idea of the developers, not on an already completed project, which will take some time to implement. Only after that it will take the shape of a project and be launched.
ICO tokens very rarely provide the opportunity to receive dividends. Moreover, investors, owners of digital coins do not get the right to participate in decision-making, which can change the development path of the project.
As for the IPO, in this case, we are talking about officially registered companies that can already offer something more than an idea (some product, market position, etc.).
The purpose of acquiring IPO shares is to receive dividends (a percentage of the company's profits), as well as the right to influence by any means (directly or indirectly) the development of the project.
IPO and ICO: the difference in regulation
An investor must understand the differences in the regulatory methods used for each of the investment vehicles, whose models are broadly similar and in demand among investors.
- ICO activities are not regulated by any legal norms.
- IPOs are regulated by the laws of the state on whose territory it takes place.
For example, in a number of countries (South Korea, China), ICO, as a tool for investment, is prohibited at the legislative level. In many countries, the government is trying to find ways to ensure at least primary control, developing a flexible regulatory policy. A prime example is the U.S., where the Securities and Exchange Commission is responsible for overseeing ICOs and securing the project. In parallel, fundraising platforms from investors, provide reports to the state financial authorities.
To date, this is all but the exception to the rule. The reputation of the project founders and blockchain as a popular, but still only developing technology, can be confidently named as the key guarantors of ICO reliability.
The procedure is as follows: the issuing company forms an information platform and organizes the acceptance of investments. So far, the current legislation in most countries does not allow to clearly define, and even more to give a specific form to such financial relations. This is a particular risk, because in the case of fraud or failure of the project, the funds invested in the ICO will not be returned legally, as the investors are not legally protected.
IPO, on the other hand, is a very strict and strictly regulated investment instrument. Most countries in the world have adopted regulations at the legislative level. That means that companies preparing to enter the market with an IPO must make thorough preparations involving public institutions and apply specific investment vehicles.
It is possible that the company will be required to:
- make adjustments to the structure (legal and organizational), including a review of management principles and the personalities of the management team;
- to increase brand recognition, including improvement of credit history;
- choose the right stock exchange for the IPO, as well as decide on the partners for the IPO.
The timing of the flotation is important. It is considered correct to hold a "roadshow" on the eve of the IPO (the calendar month is considered optimal). This period is reserved for meetings with potential investors.
The final stage of the IPO is a public offering with access to a wide range of investors.
Such investment tools will be the most successful in the eyes of investors, if the company is not stopping in development, developing new markets, expanding production network and sales lines, and is engaged in the introduction of new management technologies.
As you can see, the outward similarity between the ICO and IPO models is deceptive. Instruments have a number of significant differences, which affect the level of their prospects in the eyes of investors.
It is impossible to say unequivocally which option is the best for investing. The choice depends on the goals and plans. And let a review of a number of similarities and differences, will be one of the key arguments for making informed investment decisions.