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Initial Coin Offering: A Startup’s Guide to Launching an ICO

The need to find other methods for startups to raise money has resulted to various experiments. These trials included the so-called Initial Coin Offerings, or ICOs.

Taking over the tech industry and changing the way new companies raise capital, ICO became a big thing within the blockchain sector. Back in 2017, startups were able to raise over $5.6 billion of capital globally.

So if you are looking for the newest trend in cryptocurrency trend today, ICO may be a good start. The question is whether this type of offering is the right investment for you. To answer that, we need to understand everything about this phenomenon.  

What is an Initial Coin Offering?

An ICO or Initial Coin Offering is the process of selling new cryptocurrency or token at a lower price to help raise money. It is a fundraising method where someone trades some newly issued tokens for bitcoin or ethereum. New digital currencies can be bought for about one week or more. 

Unlike in the stock market, the token does not have any ownership rights in the tech company, nor does it consider the owner entitled to any kind of cash flows, such as dividends. Prominent venture capitalists, family offices, and less wealthy cryptocurrency participants are some of the buyers in an ICO.

This type of system is also one of the simplest and most effective means for corporations and individuals to finance their projects, as well as for regular users to invest in businesses they consider profitable.

ICOs however, are highly risky even under the best of situations. Most of them raise money pre-product, thus making the investment considerably speculative and risky.

ICOs are also still shrouded with doubts. Many believed it is an unregulated means by which money is raised for a new digital currency venture, while others see it as an improvement in the traditional venture-funding model.

An Initial Coin Offering is sort of a shortcut. It allows startups to bypass thorough and supervised capital-raising procedure required by venture capitalists or banks.

What is a Token?

Tokens

An ICO or Initial Coin Offering is somewhat a combination of an initial public offering (IPO) and a crowdsale. If an individual want to access a certain project, he/she will have to send the developing team some money, usually in the form of bitcoin or ethereum, to obtain the corresponding amount of tokens in return.

A token tends to have multiple purposes. It can be described as a digital asset programmed to store and use several levels of value. In simple terms, a token can be almost anything, which is programmable on a smart-contract blockchain.

Tokens are often initially hosted on another platform’s blockchain, and then are trasferred to their own chains afterward.

Tokens have at least two types:

  • Usage Tokens

These are tokens that act like a currency in a particular setting. They can be traded for other tokens or fiat money. Ethereum is one example of a usage token.

  • Work Tokens

Work tokens do not function like a currency, but they can provide various rights within their native surroundings.

If the person for instance, is a decentralized autonomous organization (DAO) token holder, then he is entitled to vote on whether a particular decentralized application (DAPP) could receive money from the DAO or not.

Token Use Cases

Use cases are vital to a token’s success. Even if the team is the best there is, if the token does not have any fundamental value in the company’s platform’s system, it will eventually fail. 

Here some of the most common uses for tokens. If the token is not functioning at the very least one of these options, then the token is not needed, therefore eliminating the reason to perform an ICO.

  • Currency

Currencies might be the first thing that is likely to come to mind when determining how cryptocurrencies are use. The simple peer-to-peer (P2P) transfer of value became the foundation on which bitcoin was created.

Read also about the Best Currency Pairs to Trade

  • Value Exchange

This is not necessarily monetary value exchange; rather it is an exchange of ideas. For example, the prize for posting good content on a certain social media would be a token that has monetary value attached to it.

By posting a content deemed as valuable, the company benefit the community and platform as a whole.

  • Toll

It is one of the most widespread token usages today. A toll is the fee that a company is required to pay to use the platform’s services.

This is usually viewed in network fees for digital currencies, such as bitcoin. It is also considered as the price to execute a smart contract, like on Ethereum.

  • Function

The token itself in this situation will be used to develop the user’s experience. For instance, an individual will able to watch a video without any advertisements by paying with a certain token.

  • Right

Token holders will be entitled to some kind of right, which may be a voting or a governance privilege.

  • Earnings

A token owner would have the right to be given a piece of a company’s profits. This is often seen nowadays with stock dividends from traditional securities, but is almost unknown in the cryptocurrency market.

Is it legal?

The question whether an Initial Coin Offering is legal or not is mostly undetermined. Ideally, the token during the process is sold not as a financial asset but as digital goods, like several commodities, therefore calling it a crowd sale.

For this reason, in the most jurisdictions, the funding with an ICO is not officially permitted. This makes it extremely easy and paperless, provided a lawyer familiar with the matter is involved.

ico-legal

How governments choose to regulate this new system is one of the big questions in the industry. The Internal Revenue Service (IRS) has said that virtual currency, overall, is taxable given it can be changed into a dollar currency.

In addition, another decisive factor to think about is whether or not the token can succeed a Howey Test. If it does, it must be deemed as a security, and it must follow certain rules implemented by the Securities Exchange Commission (SEC).

What you need to know about an ICO?

ICO - Initial Coin Offering and Tokens Infographic

  1. It offers an alternative approach

Up to now, proposing an idea to venture capitalists still remains a means to raise funds, though it is no longer the only way.

As an alternative strategy, an Initial Coin Offering could be another way for a starting business to get the money needed to achieve its goals. If a startup realizes that it has to raise funds to employ new people or execute marketing efforts, then it may be the time to think about its options.

Venture capital firms as well as private or seed investors are worth trying, but an ICO might be the best way to do it. However, getting the process done is not that simple. It can be as taxing as obtaining capital, but the company is more in control of the procedure.

  1. Intense competition

Keep in mind that there is more to succeed with an ICO than meets the eye. Companies should not expect that investors will swarm to their ICO. The success or failure of the process wholly depends on the marketing strategy.

Those that want to set themselves apart from the saturated ICO market need to know and understand the best methods and carry it out at in a manner similar to that of businesses competing for IPOs.

Companies considering an Initial Coin Offering also need a significant amount of money, growth-coping methods, and huge creativity to stand out.

In addition, a strong advisory team and an entrepreneurial background among the founders can largely help build investors’ trust about the founders’ ability to start a business.

Aside from that, there are no quicker ways to achieve an ICO. It has to initially grow a huge online community for several months, and then invest in an eye-catching website and video.

The simple days of just issuing a white paper containing the project’s technical details and the structure of the company’s team are over. Firms must now have a real use for the token they plan to market as well as the blockchain technology that will support it.

  1. Communication is vital

Communication is vital to a company’s success. It is imperative that corporations provide a framework of their ICOs. This will consist of the technical aspects that investors will definitely examine before making a final decision.

Having a solid and graspable plan, as well as a not-too-heavy marketing record could help a company flourish. An attractive one pager description and website is also essential, since individuals buy based on what they see.

Moreover, a clear marketing picture makes a good impression with investors. They will want to see a well-defined company strategy and maybe, a firm lock-up on token bonus for the founders to consider the company fit for the long term, otherwise the business and ICO will be disregarded.

Should you launch an Initial Coin Offering?

This is the question that every company considering of launching an ICO has to ask themselves. As a matter of fact, any business contemplating of conducting this procedure needs to carefully choose whether it is really necessary to have one, given that the firm and its project will be involved.

Conclusion

If a startup intends to raise funds, but does not plan to pursue the traditional path, then an Initial Coin Offering is an method to consider. With several businesses taking notice, this 2018 might be the year of cryptocurrencies and ICOs, so now may be the time to know as much as you can.

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