ICOs vs. IPOs – What are the Differences?

ICO, IPO … I don’t know. There’s just too many acronyms to keep track of, we know. So why the widespread use of both? We did a deep dive into our two favorite new acronyms to find out the difference. We also might have been just slightly curious as to what this might mean for you and your investments.

IPO Defined

Let’s start at the beginning, what exactly is an IPO? IPO stands for Initial Public Offering. This term refers to the process of offering shares of a private corporation to the public through the issuing of stocks. By issuing these stocks the public is able to buy pieces of the company. 

The company can then use the money for further growth. However, before issuing an IPO, the company will need to make a decision regarding which stock exchange they will issue and trade their shares on. From here on out, they must continue to follow the regulations kept in place by the associated regulatory bodies.

What is an ICO? 

Before we move on, we have one more definition for you and no it’s not a typo. To explain the difference, ICO stands for initial coin offering. This term has since become popular in the crypto community and refers to a similar method of crowdfunding. The company raises this money for creating new crypto, an app or anything else that is necessary to improve the distribution of a crypto coin.

Rather than receiving a stock, an investor that purchases an ICO receives tokens issued by the company. This token is essentially a blockchain entry and may or may not hold any real “value”. 

One and the same

As you might have guessed an ICO is actually very similar to an IPO. Both cases are examples of companies raising money to further their development and expansion through crowdfunding. In exchange for the money, investors receive symbolic “pieces of the company”. However, this is where the similarities end and the differences start. 

Differences between an ICO and IPO

To keep it simple we put together a couple of the major differences. Don’t worry if you don’t get it at first. This can also be used as a review tool to come back to after. 


ICOIPO
When we issueStartupsWell-established company
ProcessUnregulatedHighly regulated
RegulationsFewMany
Risk LevelHighModerate 
StakeTokensShares 
Profit sharingNoYes
LegalitiesPossiblyYes
Length of timeShorterLonger
Security HighModerate

When we issue

The first difference that we should consider between an ICO and an IPO is what stage the company is issuing it in. An IPO is issued when an already successful and established private company wants to achieve further growth. Investors likely already know about the company and about its successes and failures. Since investors know the company, they are willing to put money towards ownership. While an IPO is typically for a company that is going public for the first time, companies may also take their company from private to public multiple times. In each scenario, a new IPO is issued.

On the other hand, crypto companies issue an ICO when they are still starting up. Rather than expanding, the intention of a company issuing an ICO is to raise money to get their company off the ground. This means that investors know little about the company’s history other than what the company chooses to share. 

Launching an IPO

Another key difference between an ICO and an IPO is the process of issuing one. An IPO is a much more extensive process that requires underwriters and lengthy evaluations to determine the market price of each share. The team required to create these valuations is often extensive and includes certified lawyers and accountants. The company must then put together the necessary documentation which includes a heavily reviewed prospectus. The prospectus is a document that outlines all the necessary information a buyer needs to know about financial investment and its implications. Once approved and a release date is selected, the IPO becomes available for purchase on the stock exchange determined in the prospectus.

The ICO Process

In comparison, for a company to issue an ICO they only have to share a whitepaper with the public. While this whitepaper does not have to include anything in specific, it must provide the necessary information to convince the public this is a good investment. A good example of a convincing whitepaper is the one issued by Ethereum

A whitepaper is a document that outlines all of the details of a given project. Yes, we mean all the details. This includes everything from how you plan on marketing your crypto, to who the first investors will be. Additionally, a whitepaper should outline the monetary goal the company hopes to reach and how many tokens will be distributed in exchange. This includes the percentage of total tokens that will be kept by the founders of the company and the percentage that will be shared with the public.

In following Ethereum’s example, it may also be necessary for a firm to include a brief description of blockchain technology for investors who are less familiar with the crypto community. Those who want to support the cause represented by the firm will then have the opportunity to buy coins with either fiat money or other digital crypto coins.

Regulations

IPOs are subject to many strict regulations and must meet specific requirements long before their issuance. These requirements include those of the chosen exchange as well as those by the Securities and Exchange Commission (SEC). Additionally, the firm must continue to audit and maintain their newly public company. Since financial statements are now made publicly available, and added accounting costs will ensure the company is still operating within the outlined regulations. This is only one of many additional costs that must now be accounted for in ensuring the necessary time and effort are put into proper reporting.

While this process has many steps involved, the process for an ICO has little regulation in place at all. This is normal for the crypto community which has yet to be accepted internationally and therefore yet to be supervised on a large scale. 

Risk Level

Alright investors, here is where you come in. As you might know, ICO’s are based on blockchain and with blockchain comes more risk (in theory). With fewer regulations and legal protections in place, it is easy to argue that this investment is far riskier than an IPO. Since IPOs have been in existence a lot longer than ICO’s it is also easier for us to trust the IPO process and the regulatory bodies that maintain it.

Although there are no regulations currently in place, with more and more people investing in ICO’s the incentive to increase regulation also increases. Afterall while the first IPO was offered in 1602, the first ICO wasn’t issued until 2013. Therefore, the process might not be so much untrustworthy as it is young.

The Stake

In exchange for your investment, companies issuing an IPO compensate investors with shares of their company. These shares represent ownership. With ownership comes a vote on pressing issues within the company and the ability to grow alongside it. This is seen through the increased value in each given share. Therefore, being an owner suggests that you have a say in what the company you invested in is doing with your money. 

Unlike an IPO, tokens are not representative of tokens in the company and are not equivalent to voting rights. Rather, an ICO gives you a share of the crypto’s market cap. Since ICO investors are not owners, they have no equity in the company and no decision-making power. The power is then left in the hands of the crypto founders. Investors typically select ICOs for the access they are then given to a certain crypto-related project.

Profit-Sharing

When issuing shares in an IPO, the company might decide to offer common stocks, preferred stocks or a combination of both called hybrid stocks. In the case that the stocks offered are preferred stocks, investors may forfeit their voting rights in favor of receiving a portion of the company’s profits (also known as dividends). 

Unlike an IPO, with an ICO there is no means to distribute the profits that the company has made as a result of the investment. That said, it is not uncommon for the organization issuing an ICO to think that they can buy back the issued tokens at the new higher price thus giving the investor greater incentive to purchase. Many investors recognize that the value of this project comes from the usage of the coin and the potential for greater adoption by other investors. More users of a given coin will result in a higher perceived value. Other coins have benefits such as airdrops (free coins or tokens for active members on a given crypto platform) or discounted fees.  

Length of time

Due to the multi-step process involved in issuing an IPO, raising money through this method can be lengthy. This is due to all the approvals needed by regulatory bodies even before the shares hit the stock exchange. This process can take anywhere from (approximately) 6 – 9 months with the right team backing it. 

In comparison, an ICO can be a lot shorter (although this is dependent on the nature of the offering). This is because the issuance of a whitepaper requires less regulation. Once the whitepaper and smart contract is complete, the ICO is ready to hit the market. An ICO will end when either a certain amount of money is raised or at a predetermined time.

Legalities

IPOs are considered legal and often are associated with high legal fees for the company issuing it. IPO’s are carefully monitored by regulatory bodies and offer safety to those who buy. As for an ICO, it has no legal definition and does not protect investors by law. Despite this, most countries do consider ICO’s to be legal. However, if you are looking to launch an ICO consider that certain countries such as China and South Korea do not have the same view. Although no specific regulations exist, ICO’s are subject to SEC regulations in the United States, and ESMA (European Securities and Market Authority) in Europe. Regulatory bodies are often careful to avoid offering widespread support of ICOs.

That being said, the legality of ICO’s is not a black or white answer. This is because the selling of tokens is viewed as the selling of goods, not financial assets. Furthermore, ICO’s are still a relatively new concept and have yet to reach the rest of the world. That said, it is believed that as ICO’s continue to become more widespread, the government will put stronger legal jurisdictions in place.

Security 

Arguably an ICO might offer greater security for a few reasons. ICO’s are only issued if a certain minimum amount is raised for the given project. Not only is there a lower limit for which must be raised for the investment to stand, but an upper limit also exists. This upper limit exists to suggest that after a certain amount is raised the company will no longer collect money to reach this goal.

This might not sound significant but let’s consider this. Unlike an IPO, you know your investment has potential. How so? If a certain amount isn’t raised, you (the investor) will receive all of your money back. However, if a certain amount is raised you know that you are well on your way to reaping the benefits of a money-making project. This is very different from an IPO as this same guarantee does not exist.

Should I Invest in An ICO?

Like anything in crypto, we HIGHLY recommend that you do your research. With little government regulation in place, there is the potential to be scammed by a fake company trying to “raise money for crypto”. Additionally, the ICO process is risky in general. Let’s face it you are investing in a project that does not exist. Projects fail all the time, even with the inspiring promises of the company. That said new and safer ways of investing in ICO‘s are becoming more popular.

However, standard investment practices still hold. Ensure that you understand what you are investing in and the associated implications and you are willing to take on the risk. If you are and continue to follow safe crypto investing practices, you may be greatly rewarded. 

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