People are always in search of new IPO’s coming in the market for investments, but now there is another sizzling hot commodity on offer namely ICO (Initial Coin Offerings). Let us dig into origins & differences between these two HOMONYMS.
The first modern IPO occurred in March 1602, when the Dutch East India Company offered shares of the company to the public in order to raise capital. In 2014, Alibaba group raised $ 25 Billion through their IPO. 2017 saw $200 billion raised through IPO worldwide. In contrast the first ICO was issued in 2013. Till date the largest ICO is Filecoin ICO, which was able to raise close to $257 million. In 2017 alone, more than $ 6 billion was raised through ICOs.
An ICO is a crowd funding strategy for startups dealing with decentralised products and services and operating on an indelible distributed ledger. It involves creation and sale of digital coins or tokens to fund the project development. Even though the name and the objective of the ICO sound similar to IPO, there is a vast difference between the two.
The word ‘informal’ is key to understanding ICOs. While your rights in the case of shares bought in an IPO are legally protected by the e l a b o r a t e s e c u r i t i e s m a r k e t regulations of your country, the legal status of ICO ‘tokens’ is up in air because many countries, including India, haven’t yet framed any regulations for them. Companies that raise money through IPOs are required to file and get approval for a detailed prospectus from regulators and provide ongoing disclosures to investors. ICOs, however, skirt all these rules and simply issue a white paper sketched out business plans.
Globally, there has been a silent rumble in ICO fund-raising, with much of the action focused on Europe and North America. But, India is also seeing a flurry of startup action around the virtual currency and Blockchain ecosystem. Reserve Bank of India has warned investors of the risks of toying with virtual currencies. Last year only, European Securities and Markets Authority, European equivalent of SEBI cautioned investors that there was a high risk of losing all their capital on ICO’s. Worldwide regulatory authorities are facing issue of whether to treat these digital token as securities or not.
A very recent example of Plexcorp came into limelight, This Montreal based company published white paper for its ICO & raised closed to $15 million. Company founders made extravagant claims of 1,354 per cent of profit in less than a month & termed it as “ Bitcoin killer”.
All these tall claims caught the attention of SEC (Securities & Exchange Commission), which started the investigation of the company. During the investigation the SEC’s Cyber unit found evidence that the founders had diverted some of the ICO proceeds to spend on their personal home improvements. Scams involving cryptocurrencies and especially initial coin offerings (ICOs) are on the rise and the trend shows no signs of slowing, as there is no proper monitoring policies placed in for them.
Investors should understand that while the crypto space, including ICOs, is exciting and can hold some potentially profitable opportunities, they are not like traditional investment opportunities, which are properly monitored & adhere to strict guidelines. They hold, generally, greater risk and are a haven for unlawful activities. Surely, virtual currencies and ICOs are a red-hot trend & I have no doubt that ICOs are going away soon. Still, until they come under proper regulation, it will be very hard to trust any endeavour from these ICO’s. Investors should do their homework and let fundamentals drive their investment decisions. Investors who choose to jump in blindly to be part of once-in-a-lifetime returns have a high risk of getting burnt.