There are many ways for companies to raise capital. Two popular methods are Initial Coin Offerings (ICOs) and Initial Public Offerings (IPOs). Each has its unique pros and cons. This article will help you understand what makes an ICO different from an IPO, comparing both and highlighting their pros and cons as trends.
For anyone looking at the best crypto to invest in today, check out Best Cryptocurrency to Invest Today.
Understanding ICOs and IPOs
Initial Coin Offerings (ICOs)
ICOs, on the other hand, are a fairly new fundraising method almost exclusively used by blockchain and cryptocurrency projects. A firm introduces digital tokens or coins to finance itself through an ICO, in which investors can buy these using cryptocurrencies such as Bitcoin and Ethereum. ICOs rose to fame during the late-2010s cryptocurrency bubble.
Initial Public Offerings (IPOs)
IPOs are the classic way in which a private company converts into a public one, selling its shares in an initial offering. Extensive regulatory approvals to comply with financial regulations, and ensure investor protection & transparency.
Key Differences Between ICOs and IPOs
Regulation and Oversight
One of the most significant differences between ICOs and IPOs is the level of regulation and oversight. IPOs are heavily regulated by a financial control authority to protect the investor and offer transparency. There is a robust set of financial disclosures and requirements that companies must meet in order to go public. Meanwhile, ICOs operate in a grey area due to regulatory ambiguity, leaving investors exposed and only as informed by the direct company or service offering which may be severely limited from widely-accepted disclosures.
Investor Base
ICOs and IPOs attract different types of investors. ICOs are accessible to a global pool of investors, including retail investors, thanks to the decentralized nature of blockchain technology. Effectively, this opens up the investment process to anyone with cryptocurrency. In contrast, IPOs are generally targeted at institutional investors such as pension funds, mutual funds and accredited individuals. Institutional investors may have a priority in accessing IPOs, but retail investors can still get involved.
Ownership and Control
Another problem is around the implicated type of investment ICOs vs IPOs offer. By selling shares in the company, investors gain stakes and ownership benefits of the business in an IPO. So shareholders get to play a part in the company’s decision-making process. ICO investors, on the other hand, buy tokens – that may or may not give them ownership and/or voting rights. This is usually product or service access, not shares of the company itself.
Transparency and Disclosure
IPOs also require companies to release very detailed financial information in the form of a legal document known as a prospectus. The prospectus provides insight into the company’s business, financial performance, risks, and future prospects, thereby promoting transparency. On the other hand, ICOs usually refer to whitepapers that are not distinguished or untrusted. While a few ICO whitepapers provide detailed information about the project, others may lack important details to be transparent.
Cost and Speed
The costs and timelines associated with ICOs and IPOs also vary significantly. These fees result in exorbitant costs which is why firms also chase IPOsutrushed to the market. This can last months or even years. In contrast, ICOs tend to be faster but also cheaper. A business may issue its own token and kick off an ICO literally within a month or even faster, thus providing the option of quick financing to start-ups.
For more details on how to create and store a cryptocurrency wallet, see How to Create a Crypto Wallet.
Benefits and Challenges
Benefits of ICOs
- Global Access: ICOs allow projects to access a global pool of investors making this method an opportunity for everyone.
- Speed: Companies are able to raise funds very quickly in the ICO process.
- Innovation: ICOs have funded new breakthrough blockchain projects leading technological progression.
Challenges of ICOs
- Regulatory Uncertainty: The lack of clear regulations exposes ICO investors to potential scams and fraud.
- Lack of Oversight: Some ICOs lack proper governance, leading to mismanagement and project abandonment.
Benefits of IPOs
- Investor Trust: The examination by regulators of the IPO process improves trust between investors and their confidence.
- Liquidity: An IPO is a market for shares or other financial transactions in which they can be sold and bought without causing an extreme change in price.
- Long-term Funding: IPOs inject permanent capital in the form of long time support for future growth and expansion of a company.
Challenges of IPOs
- Cost and Complexity: Regulatory compliance can require substantial costs and there is also an entire complex, legal process to navigate.
- Stringent Requirements: Companies must meet stringent financial and operational requirements to go public.
- Market Volatility: IPO share prices can experience volatility in the public market.
Conclusion
The advantage of ICOs and IPOs are that they come with their own benefit, but at the same time face different challenges respectively. The simplification of the fundraising process through ICOs, serves in being a quicker and more open way to source funding – which can be especially beneficial for start ups or innovative projects. The absence of rules and supervised control carries great dangers however. IPOs are expensive and time-consuming but better in terms of transparency, investor protection & long-term funding.