Definition of ICO

ICO stands for “Initial Coin Offering”, and allows a crypto company/project to raise capital from investors in exchange for their platform’s native coin/token, which is distributed upon project launch. As a type of digital crowdfunding, ICOs enable startups not only to raise funds without giving up equity, but also to establish a community of incentivized users who want the project to succeed, so their presale tokens rise in value. An ICO is considered by many to be the cryptocurrency industry’s equivalent of an Initial Public Offering (IPO), and it was the first form of raising capital in the crypto world.

Theoretically, anyone can start an ICO. When international regulators were not yet aware of this phenomenon, anyone with access to the right technology was able to start a new cryptocurrency at any time. However, this lack of regulation also means that someone could go to any lengths to convince you that their ICO is real so they can steal your money. Out of all the potential fundraising channels, an ICO is arguably one of the simplest to set up as a scam, although a hugely successful project like Ethereum was originally funded through an ICO, which has made a very important contribution to the development of smart contracts and decentralized finance.

Ethereum ICO

The ICO of Ethereum took place in 2014 and it was officially announced by its founder Vitalik Buterin in early 2014 at a North American Bitcoin Conference in Miami. Buyers received ether (ETH) in exchange for bitcoin, and more than 7 million ether was sold in the first 12 hours of the sale. By the end of the sale, more than 50 million ether had been sold, amounting to about $17.3 million. This is considered to be one of the most successful ICOs, especially since it gave birth to a blockchain that is still widely used by crypto users around the world, whose currency (ETH) sits in second place by market capitalization, right after Bitcoin. Since then, the majority of ICOs have occurred on the Ethereum network, and most have involved ERC-20 tokens.

ICO vs IPO

IPOs allow firms to raise capital from investors and distribute shares of the company’s stock to investors. Crypto companies raise money for ICOs by selling coins or tokens. Investors make their investments in both situations with the expectation that the business or cryptocurrency will experience sustained growth.

Based on this brief comparison, the differences between these two types do not seem so marked. However, in reality, there are advantages and disadvantages that both of these have with each other. Let’s take a look at some of them below:

How to Develop an ICO

Here are some steps you can follow to develop an ICO:

1. Idea: The starting point is certainly the development of the idea that will help you define your project.

2. Light Paper: Prepare a Light Paper, which is a concise document through which you describe the project goals that can be achieved by obtaining capital with the ICO.

3. Website: Right after preparing the light paper, you can start setting up a website. It should provide information about the project, the team, and the ICO itself. It should also include a way for interested investors to participate in the ICO.

4. Tour Conference: Participation in sector conferences is very important, as you can present the nascent project to a potential network of investors, gather the opinions of important personalities, or create possible partnerships.

5. White Paper: After the tour, you have the opportunity to refine the starting ideas and from the light paper you move on to the creation of the white paper, which is a document that outlines the details of your project, including the technical specifications, market analysis, and token economics. In a nutshell, a more specific document than the one you have already prepared.

6. Business Plan: Attached to the white paper, it is advisable to include a Business Plan with the relative road map in which the purely economic issues are described. Within the Business Plan, a potential investor can find indications on how the invested funds will be spent. The purpose of the ICO is precisely that of reaching capital through which to start the business activity.

7. Marketing: Once you have everything in place, it’s time to start promoting your ICO. This can include social media marketing, content marketing, and outreach to potential investors. It’s important to be transparent and clear about the risks and potential rewards of investing in your ICO.

8. The Launch: When you feel that everything is ready, you can finally launch your ICO. Even at launch (and after), there are certain steps to define and follow. These can be briefly summarized in:

• Token sale: Investors can purchase tokens using cryptocurrency or traditional Fiat currency (in some cases).

• Distribution of tokens: After the token sale is complete, the tokens are distributed to investors. This can be done through a smart contract, which automatically sends the tokens to the wallets of investors.

• Listing on exchanges: Once the ICO is complete and the tokens have been distributed, the next step is to list these on cryptocurrency exchanges. This way, you allow other people to buy and/or sell tokens.

• Use of funds: The funds raised during the ICO can be used to finance the development of the project and bring it to fruition. This might include hiring a team and marketing the project.
  One of the major recommendations that you should follow is to understand the legal implications of launching an ICO in your jurisdiction, as well as being open and transparent about your business and the ICO process.

Highlights
Initial coin offerings (ICOs) are a way for companies to raise funds by issuing their own digital tokens. They enable startups not only to raise funds without giving up equity, but also to establish a community of incentivized users who want the project to succeed, so their presale tokens rise in value.
The ICO of Ethereum that took place in 2014 is considered to be one of the most successful, especially since it gave birth to a blockchain that is still widely used by crypto users around the world. 
While ICOs have many advantages over IPOs, such as the extension to a global market, speed of execution, and disintermediation, they also have risks related to the absence of collateral, abrupt company failure, and custody of funds.

Conclusion

In this module, we have addressed the topic of ICOs and made the necessary comparisons with the more traditional IPOs, to fully understand the opportunities and risks associated with the new approaches that are used to raise capital by companies or startups. In the next module, we are going to analyze STOs and talk about how they differ from ICOs.