Ipos Vs. Icos: The Key Differences Between The Two

Oct 13, 2020 05:42 AM ET
Ipos Vs. Icos: The Key Differences Between The Two

Overview

In the world of stocks and cryptocurrencies, IPOs and ICOs, respectively, have been dominating the space. The latter is a much newer type of offering that is slowly gaining better understanding by the public. Ultimately, both vehicles seek to fulfill one objective: raising funds for their businesses. This similarity is probably the only underlying theme between the two since more distinctions mean different things for investors and companies alike.

The main definition of an ICO and IPO

The main definition of an ICO and IPO

An initial coin offering (ICO) can be thought of in two strands: launching a new cryptocurrency from scratch or, more commonly, tokens derived from an existing cryptocurrency. The latter is a cryptocurrency-led crowdfunding project for a new app or service. In this situation, the company offering the ICO will sell their tokens to investors who would contribute in return using a cryptocurrency like Bitcoin or Ethereum. 

It has increasingly become an innovative method to launch a new business, service, or app without the red tape of traditional funding methods. An example of a successful ICO is Chainlink, which is a token deployed on the Ethereum platform. The primary purpose of Chainlink is to provide real-world data to enhance smart contracts on the blockchain. Since bursting onto the scene in 2017, its price has seen an over 2000% increase, making it one of the successful ICOs recently.

 

The main definition of an ICO and IPO

On the other hand, an IPO (initial public offering) refers to a private company becoming a publicly-traded entity with the public issuing of their stocks. This event is widespread with blue-chip companies that have gained substantial traction in their niches. Getting to the IPO stage for most companies worldwide means they are already widely profitable with several years under their belt. An example of a successful IPO is the American software company, Anaplan, whose stock has risen by over 6000% since going public in October 2018.

Core differences between ICOs and IPOs

Trust: The practice of going public has existed for decades and is very stringent. In most countries, for a company to list on its native stock exchange, its revenues have to be at least in the hundreds of millions, if not more. Getting to this privileged stage takes many years. By becoming so valuable, the key feature of any IPO is that the companies already have a working product that has gained significant traction in the market. On the other hand, ICOs often have no complete product in the marketplace, but rather a detailed whitepaper and proof of concept.

Uses: Analysts conclude an ICO as a form of crowdfunding for a proposed project, whereas an IPO is not crowdfunding as such. Crowdfunding can only be required by start-ups that desire to avoid funding using the traditional routes of venture capitalists, financial institutions, and the like. While in some countries, start-ups can go straight to the IPO process, these are exceptions rather than the norm. Though the goals of IPOs and ICOs are for capital expansion, ICOs need capital for new projects. In contrast, IPOs need money to expand already existing projects and maybe for newer ones too. However, the former is more the primary focus of IPOs.

Ownership: With an IPO, some stocks allow one to become a shareholder with voting power in the listed company. In most cases, buying a stock affords the investor a tiny piece of equity in the corporation. For an ICO, ownership of this nature doesn’t exist as the participants only own the tokens. 

Regulation: Regulation is where ICOs have received the largest criticism, and with good reason. Considering this fact, they are tremendously riskier for investors than for their creators due to a few elaborate scams. A 2018 study discovered that more than 50% of ICOs failed within the first 4 months of existence. 

While high-tier watchdogs regulate legitimate IPOs in their respective jurisdictions, ICOs are primarily self-regulated, where no official authority exists. Nowadays, it’s highly unlikely to be scammed via a genuine IPO since there are various middlemen involved, unlike with ICOs.

Even the listing requirements of ICOs are far less strict than their counterparts. Although IPOs need to have shares listed on a recognized stock exchange, ICOs can begin without their tokens even being available on any recognized crypto exchange. Furthermore, it’s much easier for anyone to participate in an ICO, dissimilar to IPOs where various brokers need to follow KYC (Know Your Customer) and anti-money laundering laws.

Risks for investors and the future of business funding

There is no doubt that ICOs have grown tremendously, especially around the boom of Bitcoin’s price in 2017. Plenty of people quickly jumped on the bandwagon to gain a piece of the pie. While this attention has been abundant, the imminent risk with ICOs is still scams. IPOs have a much more stringent process that makes fraud highly improbable. Critics indeed have praised cryptocurrencies for decentralization. However, this aspect leaves very little room for preventing fraud where everything happens online. Therefore, currently, it could be safer to invest in an IPO than an ICO, though we can only wonder about the future. 

We could see more and more companies shift to an ICO model, which cuts out many middlemen, exuberant listing fees, and legal requirements. There is definitely an opportunity here for anyone with enough courage to get involved in ICOs despite the present lack of regulation.

Conclusion

The main difference between IPOs and ICOs is that an ICO only needs a white paper to materialize, whereas an IPO occurs for a highly profitable and well-established corporation. Presently, we could conclude there are more risks associated with ICOs, though we hope that this will change eventually. If a change does appear, that may see more companies looking to go the ICO route and disregard the more laborious, stern, and expensive IPO process.

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