Move aside IPOs, there’s a new kid in town with the speed and agility to take a concept to market without the excess costs, regulations and red tape that IPOs are known for. Where IPOs (Initial Public Offerings) come much later in the game to make them of any use to fledgling startups, ICOs (Initial Coin Offerings) provide new businesses with the capital they need to get things started. ICOs obviate the need to qualify for business loans with potentially high interest rates or seek out investors that may or may not be interested in the risks your company poses. I sat down with Kai Chen, an expert in ICO’s and CEO of Olympus Labs, a blockchain platform that offers a marketplace of tools and derivative products for brokerage house and institutional investors to get his insights.
Disclosure: This is a Sponsored Article
WHAT IS AN ICO?
An ICO enables a company to raise capital from a multitude of sources. Unlike an IPO, this new type of offering does not issue shares of ownership – they sell digital tokens that are developed via blockchain technology. The ICO process, like crowdfunding, allows the general population to more directly profit from the emergence of new technologies than they could under a traditional stock-ownership model.
WHO USES ICOS?
Generally speaking, companies that are developing DAPPS (decentralized apps built on blockchain technology like Ethereum) use ICOs to raise money and value the tokens they will use in their app or service. Once the tokens are attributed, they are listed and traded on private exchanges like Kraken or Poloniex (think of it like Nasdaq for tokens).
HOW DO YOU START AN ICO?
It is somewhat more nuanced now as some countries are banning ICOs such as China (already banned ICOs) and Korea (announced that they will), and other jurisdictions such as the US and Singapore are starting to issue ICO licenses/considering get-approved sandboxes for ICOs, there is no hard and fast rule in crafting an ICO. With that said, investors are not going to take a risk on your company without knowing something about your company. Most companies initiating an ICO will craft a whitepaper or other informational packet that provides details of the investment required, the players, the project to be funded, company goals and what will happen to their investment if the investment goals are not met. If an ICO meets its investment goals, the company can use that funding to launch their project. If the investment goal is not met, the funds are returned to the investors.
WHEN DO YOU LIST YOUR TOKEN?
The timing of token listing depends on the project, sometimes it’s not until months after the ICO that it is listed on private exchanges. Once the ICO date is chosen, the marketing begins.
The ICO itself is usually a short, fixed period of time (sometimes, only minutes) when investors may purchase tokens. In some cases, companies hold exclusive pre-sales of tokens to select investors, in some cases, with a discount.
HOW ARE TOKEN PRICES SET?
The company initiating the ICO will decide how much funds need to be raised and how many tokens will be distributed. This simple equation forms the basis for the price. Once the tokens are traded on the cryptocurrency exchanges, the value will fluctuate based on market factors.
WHAT DOES IT COST TO RUN AN ICO?
The majority of your costs are going to consist of legal fees and marketing, which can run anywhere from $50,000 to upwards of $1,000,000 or more. Other fees include operating your ICO on a platform like Ethereum, setting up the characteristics of your token, and blockchain registration fees for each transaction.
WHERE CAN YOU LIST YOUR ICO?
Platforms to list your ICO are ubiquitous, with more popping up every month. Some popular listing platforms include:
- CoinSchedule
- ICO List
- ICO Tracker
- Reddit’s ICO Crypto Forum
- Smith + Crown
While ICOs are the new IPO for DAPP firms and are relatively unregulated at the moment, there are still pitfalls you will want to look out for. Be sure to connect with an advisor who is experienced in cryptocurrencies and the ICO process before moving forward.