Initial Coin Offering (ICO) is a new way of fundraising enabled by digital currencies and Blockchain technology where participants invest fiat currencies and receive ‘‘tokens,’’ digital assets in return.
ICOs are widely seen as an innovative fintech alternative to traditional initial public offering of stock (IPO) as a means for start-up businesses to raise capital. A person, project or company in need of capital creates a new kind of digital coin and sells a tranche of them for fiat currencies on a digital trading platform or exchange.
Prior to an ICO, a business would typically release a “whitepaper” which provides investors with an explanation of their proposed project, the rights behind the virtual tokens they would be issuing, the risks of the investment and details of the ICO itself.
The rights behind the digital tokens can vary considerably, and many tokens are not intended to grant the investor an ownership stake in the business, unlike stock.
Currently, there isn’t a standardized way of preparing a whitepaper in comparison to regulated prospectuses for IPOs.
ICO’s token valuation
With the exception of hedge fund managers who indiscriminately assess ICO tokens for their long and short selling prospects, the underlying motivation of an ICO investor is the expectation that the token’s value would uptick after the ICO, and the investor would sell it to make a tidy profit.
A token’s value is determined based on (1) the demand for the token which may be denominated in a highly volatile virtual currency (2) the underlying company’s financial performance. Currently, there isn’t a standardized way of determining a token’s value. ICO investors trade these tokens at a profit or loss.
The Ethereum (ETH) ICO platform is public and open-source and features smart contract functionality. It is still in its early stages of development, and its application is of experimental nature.
Vitalik Buterin, co-founder of ETH, cautioned that there are flaws, technical intricacies of ETH Blockchain networks that support ICOs arising from the centralization problem, which could take up to two to five years to solve. Buterin expects 90 percent of ETH-based ICOs to fail…