Understanding Initial Coin Offerings

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What is an ICO?

An ICO or Initial Coin Offering is a way for a company or organisation to create their own cryptocurrency and then offer it to others publicly for purchase.

This cryptocurrency can have their own blockchain, such as Ethereum did in 2014, or it can be token-based on top of another platform, such as the ERC20 tokens based on Ethereum. The latter is actually the most common route and is also how we at TenX created our PAY tokens. In an ICO, the buyers of a company’s token exchanges cryptocurrencies with the company in return for the newly created token. The company receives the money, the buyer the token.

In an ICO, a company sells part or all of a newly pre-mined token in return for receiving other cryptocurrencies, just like Ethereum did for their own start. We at TenX, for example, did one of the largest ICOs to date, where we received around 80 million USD in less than 7 minutes on June 24th, 2017.

How is an ICO different than an IPO?

An IPO, or Initial Public Offering, is the event of a company offering their shares to the public. The company receives the investors’ money, the investor receives shares and owns part of the company. An IPO requires an investor prospectus, as the investors who now own part of the company have clear rights and insights. An ICO is very different, in that a proper ICO offers a new cryptocurrency that, per-se, does not offer much of any rights. Normally, a token does NOT offer any ownership in the company and should be seen as in independent “thing” that may or may not increase in value. It is more of a “hope of the token buyer” that the company will do with the money what they proposed to do. This is very different than an actual security, even though many tokens come close. As an investor, it also means that you must understand that an ICO has incomparably higher risks than an IPO.

What is a token sale / token generating event?

You might have heard that companies call an ICO a token sale or token generating event. While some of the legalities behind them might be different, the process for a token buyer is quite similar. At TenX for example, we called our event a token sale, as we sold around 100 million PAY tokens in return for cryptocurrencies, worth around 80 million USD. It was similar to a Kickstarter campaign, where a company sells for example 10,000 backpacks for 100 USD each, receiving 1 million USD in total. After the sale is done, the company has no more duties other than to fulfill the function of the token. In the case of TenX, this is for PAY to function as a loyalty program.

Why do companies do ICOs?

Generally speaking, a company needs a few things to launch: a good idea, even better execution, and a rock star team to do all that. With that comes the challenge of financing the entire operation. While traditional methods of financing through Angels or VCs are possible, the crypto world has turned towards this new form of direct business to investor financing called ICOs. The upside for the company is that they can receive a lot more money without giving up any equity (piece of their company) if they do a good job. The upside for the token buyer is that an ICO can be very attractive as an investment.

What makes a successful ICO?

The big problem that remains is that most companies doing an ICO are still startups. Pure statistics tell that 99% of all startups fail—therefore, also ICOs. If you, as a company, want to do a successful ICO or you want to find ICOs that are more likely to succeed as an investor, look out for these five key points:

  1. Have a great and compelling IDEA that solves a real-world problem.
  2. Have an even better EXECUTION, as ideas are worth very little if not acted upon.
  3. Have a kickass TEAM with developers, product people, legal, structure, marketing, and much more.
  4. Make sure the TOKEN’s legal obligations and the ICO’s financials are sound. What are the market cap, price, structure, token function, etc.?
  5. Look for excellent COMMUNICATION. If a team is not transparent or reachable, step away.