ICO is an acronym for Initial Coin Offering. When a new cryptocurrency or token is launched, developers offer investors a limited number of units in exchange for other major cryptocurrencies such as Bitcoin or Ethereum.
ICOs are great tools for quickly raising development funds to support new cryptocurrencies. Tokens offered during the ICO can be sold and traded on cryptocurrency exchanges, given sufficient demand for them.
The Ethereum ICO is one of the most notable successes, and ICOs are growing in popularity as we speak.
A Brief History of Initial Coin Offerings
Ripple is likely to be the first cryptocurrency distributed through an ICO. In early 2013, Ripple Labs started developing the Ripple payment system and produced approximately 100 billion XRP tokens. It was sold through an ICO to develop the Ripple platform.
Mastercoin is another cryptocurrency that sold a few million Bitcoin tokens during its ICO in 2013. Masterson aims to tokenize Bitcoin transactions and enforce smart contracts by creating a new layer on top of existing Bitcoin tokens.
Of course, other cryptocurrencies have been successfully funded through ICOs. In 2016, Lisk raised nearly $5 million during its initial coin offering.
However, the Ethereum ICO in 2014 is perhaps the most notable to date. During the ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoin, raising about $20 million. As Ethereum harnessed the power of smart contracts, it paved the way for the next generation of ICOs.
Legality of ICOs
When it comes to the legality of initial coin offerings (ICOs), it’s a jungle. In theory, tokens are sold as digital goods, not financial assets. Most jurisdictions still have to regulate ICOs, so assuming the founders have an experienced lawyer on their team, the entire process should be paperless.
However, some jurisdictions have taken notice of ICOs and are already regulating them in the same way they regulate the sale of stocks and securities.
In December 2017, the US Securities and Exchange Commission (SEC) classified ICO tokens as securities. In other words, the Securities and Exchange Commission is gearing up against ICOs that it considers misleading to investors.
There are cases where a token is simply a utility token. This means that the owner can use it to access a specific network or protocol, and in that case it cannot be described as a financial security. However, stock tokens, which aim to increase their value, are much closer to the concept of a security. In fact, most token purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs remain a legal gray area and until clear regulations are in place, entrepreneurs will try to profit from ICOs.
It’s also worth noting that once the regulations reach their final form, the cost and effort required to comply could make ICOs less attractive than traditional funding options.
Currently, ICOs are still the best way to fund new C-related projects.