So what is an ICO and how do they work?

Let’s start with the basics: ICO stands for Initial Coin Offering. They are used to raise money for growing businesses that need cash to jumpstart their growth. People the world over have the chance to buy tokens or coins emitted by the business in the hopes that the value of their coin increases as more people use the service and the value of the limited number of coins increases with demand.

So it’s like an IPO?

This is a common mistake and one of the first things that needs to be addressed when talking about ICOs. They are VERY different from IPOs.

IPOs, or Initial Public Offerings, are an extremely common way for the businesses to raise money quickly. However that and their similar acronyms are where the commonalities stop.

ICOs and IPOs are very different and serve different functions for different kinds of businesses. However they are not mutually exclusive – a company can in theory do an ICO then later on do an IPO, however the inverse is likely impossible.

Why? Because the government says so.

Less government red tape

An IPO allows the public to buy shares of a company for the first time (hence the ‘initial’). This means the company is basically going to have to sell itself and its performance history to the public and explain why it is worth what they are asking.

Since the public is involved and the sums are generally very large, the government steps in to make sure that everything works as it says it should. Businesses that want to use this potent method of raising money need to jump through a LOT of government hoops and prove all kinds of things to regulators (this is, however, outside the scope of the article).

Because there are so many hoops to jump through and because the sale price of the company tends to be based on past performance and extrapolated future potential, the IPO is generally utilized by companies that are further along their growth cycle.

Different stages for different folks

Because of the resources required to jump through all of the government hoops, IPOs are rarely done by companies that are just starting out. If they need money they are more likely to use a Kickstarter campaign or hit to Venture Capital circuit in hopes of someone realizing the kind of potential they’ll be brining to the table.

So unfortunately the IPO method of offering value to the public in exchange for funds has traditionally been closed off from the younger companies by the industrial-strength red tape that they have to cut through.

The ICO offers something similar to younger companies. You produce a whitepaper describing your product, market, and business plan, then people that are sufficiently convinced will be able to buy in on the ICO.

It allows the public to buy in on future growth early on by acquiring tokens. But tokens are very, very different from shares.

Coin is value, not always power

Tokens and coins have one thing in common with IPOs and that’s that they let you get in on the growth of the business. But they are not shares. Not by a long shot.

And this should make you happy.

Shares of a company are literally slices of it. You are a part owner of the company and often have voting power in the election of executives and occasionally on mergers and other parts of running the business. ICOs are for young or growing businesses. Imagine if you are trying to grow a business and then suddenly have a few thousand people that you have to run the business decision by.

It would strangle a young company.

ICOs allow you to vet both the idea and the team that are executing their business plan. If you buy tokens you are probably doing it not only because you believe in the idea, but also the team.

Now some tokens do have voting rights, but this is very rare and you won’t find many ICOs that

emit this kind of token.

The ICO is the future

The ICO clearly has a ton of benefits for growing businesses and for buyers. It allows companies to raise money from people all over the world in order to build their company and execute their idea. They give up no control of their business and the buyers of the tokens take on no responsibilities.

They do, however, buy into the growth of the company and that’s what everyone is here for.