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Initial coin offerings (ICOs) are ways to start crowdfunding a new cryptocurrency project. Through an ICO, investors purchase tokens used in the project’s ecosystem. At their prime in 2017, they had surpassed traditional venture money as the primary funding source for blockchain firms. Nowadays, Incubator and VC companies are also heavily invested in the crypto market.
Here is everything you need to learn about ICOs.
What is an ICO
An ICO (Initial Coin Offering) is the crypto industry’s equivalent of an initial public offering (IPO). It can be launched by a firm seeking funding to build a new currency, app, or service.
Investors who participate in an initial coin offering will get a new cryptocurrency token issued by the firm. The token may be useful to the firm’s product or service.
It might represent a stake in the company or project as an alternative.
Unlike an IPO, which government agencies regulate, ICOs are unregulated. Firms can launch an ICO with just an idea and a white paper. For this reason, ICOs are becoming increasingly popular among startups looking to raise money.
However, it makes them ripe for scams and allows for innovation and experimentation.
Different Funding Stages in an ICO
Although ICOs look good in context, they are not for the faint of heart. The crypto market is fiercely competitive, and authorities and the crypto community will scrutinize your idea closely.
If you’re thinking of starting one, here are the different funding stages of an ICO:
The first round of investment for an ICO occurs early in the process. Sometimes it’s not even mentioned or included in the funding rounds. Generally, the stage is known as “pre-seed” funding, when a company’s founders are just getting things started. ICO’s founders, close friends, supporters, and family are the most prevalent “pre-seed” funders.
Additionally, the stage might happen quickly or take a long time, depending on the nature of the firm. The early costs of establishing the business idea add to the factor. It’s also possible that, at this point, investors aren’t investing in exchange for stock in the company.
Close project backers, staff, and institutional investors are typically the only ones included in private sales. But some also open the sale to the general public. Those picked are required to complete a KYC and invest a minimum amount.
Private sales are sometimes the cheapest and earliest time for those individuals to buy tokens. However, private sales are frequently capped and will end when the limit is reached.
Normally, private sales are regularly used to attract venture capital. Many advantages exist when selling a whole private round to a single or small group of investors. It can include access to expertise, assistance, network, and other marketing initiatives.
A pre-sale is held before a public auction, and it’s completely optional. Pre-sales are frequently attended by family, friends, and other members of the founders’ network. You must normally be whitelisted to participate in a pre-sale.
As a result, projects commonly use this time to create various marketing challenges and contests. They may also provide other incentives with investments, such as beta testing advantages, more tokens, or priority access.
A public sale is the last and most important part of ICO funding. It is frequently time-limited and held in collaboration with a launchpad on a First-Come, First-Served, or Oversubscription basis. During this stage, any remaining tokens from earlier rounds are sold.
What is the difference Between a Soft Cap and a Hard Cap?
Before considering an ICO, investors and users must consider various aspects. Two of the most prominent features investors need to check are the hard cap and soft cap of an ICO. A hard cap refers to the highest amount of money the team hopes to raise in return for its tokens. When a project reaches a hard cap, it implies that the tokens for that round have sold out.
On the other hand, the soft cap is the lowest amount that can be raised in an ICO fundraising event. It’s the polar opposite, as teams compete for the smallest amount of funds feasible to keep the project going. If a team does not raise enough money to reach its soft cap, it usually returns the money to investors. However, some continue to operate with whatever funds they have.
How to Judge an ICO?
The quality and who is in the team are the first and most crucial things to watch. A solid project will usually include experienced founders who will be more likely to avoid pitfalls. Check each ICO team member’s LinkedIn and social accounts for as much information as possible.
However, while most businesses prominently display their team and partners, it’s crucial to double-check their claims. Some projects have been accused of exaggerating their team’s qualifications and fabricating non-existent collaborations.
Make sure to ask questions like:
- Are the company’s founders and stakeholders capable of effectively completing the project and delivering the expected results?
- Can they be relied upon?
Another thing to look for is the white paper. As a potential investor, you must read the ICO’s white paper. A well-documented and exhaustive white paper is the most reliable resource for determining the project’s legitimacy.
Let’s say it’s the bible of the whole project.
It will explain all you need to know about the ICO project. You can check if it is worth your money, commercial usage, revenue system, and token trading on exchanges. In addition, whitepapers define the project’s objectives and tactics.
Regulation Around ICOs
The DAO report was released by the SEC in July 2017. It is noted in this study that most tokens offered in ICOs are securities. Additionally, the report cautioned issuers and other market participants to follow federal securities laws while offering and selling such tokens. The regulations around ICOs and IDOs are different in each jurisdiction.
It is important to do thorough research before doing your fundraising using this new technique. There are several companies with blockchain expertise in compliance & law.