The geography of ICOs has been found to be important because its presence in markets with specific conditions contributes to the flourishing of blockchain-based ventures. For instance, the existence of developed financial markets, advanced digital technologies, crowdfunding platforms, and the will to develop regulations contribute significantly to the attraction of ICO projects (Huang et al. 2020). Projects located in the USA are considered to have particularly positive outcomes, , along with projects located in Israel and China (Fenu et al. 2018).

• As in crowdsourcing, ICO projects can reduce or eliminate the involvement of third parties because of the blockchain’s trust-free and transparent nature, which allows completely secure transactions (Frizzo-Barker et al. 2019).
• The CEX platform also takes charge of promoting and marketing the IEO.
• Because of the low barrier to entry, many new types of cryptocurrency are launched through this process.
• The SEC is actively protecting investors from unregistered or fraudulent ICOs, see examples of enforcement actions and trading suspensions here.
• Although we are confident of their correct usage in the model, we could not ensure that they were completely unbiased and we, therefore, decided to exclude them.
• The settlement did not require a restitution offer, registration of tokens, or any disqualifications.

Tokens sold through an ICO may offer utility, meaning that the owner can exchange them for access to a certain product or service. In rare cases, they may represent an ownership stake in the https://globalcloudteam.com/ start-up that launched the listing. Despite being often compared to IPOs , ICOs are quite different in the sense that investors are not buying any kind of ownership of shared in a company.

What Is LUNA Crypto? A 101 Guide

In that case, the entity may not be as legitimate as it claims or is nascent in its developmental stage. This means they lack the supervision or oversight of a central authority like a bank or a government. If an investor invests in an ICO and gets scammed, there’s little-to-no recourse to get their funds back. The SEC has been known to take action against some projects — including Telegram, which was ordered to return a large sum of the $1.7 billion it raised for the Telegram Open Network back to investors.

However, companies offering ICOs issue new crypto tokens instead of stocks or shares to investors. These token offerings may come in the form of security or utility tokens. An initial coin offering or initial currency offering is a type of funding using cryptocurrencies. It is often a form ico vs sto of crowdfunding, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of cryptocurrency is sold in the form of “tokens” (“coins”) to speculators or investors, in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ether.

What investors need to know

In short, the person or team behind a new crypto outlines their plans in a white paper, explaining what the crypto is and how it’ll work. You are now leaving the SoFi website and entering a third-party website. SoFi has no control over the content, products or services offered nor the security or privacy of information transmitted to others via their website.

Essentially, the tokens are representations of an asset or utility in the blockchain. They should not be confused with cryptocurrencies because the tokens are just modifications of existing cryptocurrencies. Unlike stocks, the tokens generally do not provide an equity stake in a company. Instead, most of the tokens deliver their owners some stake in a product or service created by the company. An initial coin offering is a type of capital-raising activity in the cryptocurrency and blockchain environment. The ICO can be viewed as an initial public offering that uses cryptocurrencies.

Dynamic Supply and Static Price

Although this is possible, it takes considerable research and time sorting through the vast numbers of upcoming ICOs. Because cryptocurrency projects are volatile, there’s a significant risk that the token loses value or ends up failing entirely. With all that goes into an ICO, it takes a dedicated team to be successful. You can create a team yourself or work with an ICO company that specializes in these offerings. Following a speculative boom in cryptocurrency prices that peaked in December 2017, regulation of cryptocurrencies has been rapidly changing.

Our results are also important for regulators, as ICOs are mainly unregulated and have vast future potential, and for investors, who can benefit from our analysis and use it in their due diligence. Initial coin offering projects have been compared to other more traditional forms of financing, such as initial public offerings , venture capital , and crowdfunding (Block et al. 2020). Nevertheless, ICOs have unique characteristics that differentiate them from other types of financing and make them more suitable for financing innovative projects that offer information goods . Indeed, the use of blockchain solutions (e.g., equity-based security token offerings) for financing new ventures has several advantages. Regardless of the sector in which they operate, newly created ventures obtained significantly lower discount rates when using these solutions compared to VC financing , increasing entrepreneurs’ returns . These characteristics allow the democratization of access to capital markets .

Initial Coin Offering (ICO) Types

We reinforce some of the conclusions found in the literature and add new insights that can be important in determining a project’s outcome. Indeed, a project promoter should, for instance, focus on having a detailed whitepaper, in which the team is disclosed and some technical details are highlighted. Furthermore, the project’s timing should be selected to take advantage of cryptocurrency prices, the campaign should be as short as possible, and social networks should be well-managed. In summary, the ICO project’s promoters should take advantage of the messages presented in the literature to control all the factors that can obtain the best outcome. Our research is also important for regulators, mainly regarding our conclusions concerning whitepapers.

We found a negative impact of higher prices of Bitcoin on project success . On the contrary, higher Ethereum prices meant more successful projects . As most ventures are Ethereum-based (Fenu et al. 2018), the appreciation of cryptocurrency might influence investors perception of an ICO as a good investment. Initial coin offerings must be understood as part of an environment comprising several systems. The supra-system interactions are characterized by the exchange of information, here treated as signals of the projects’ quality and posterior feedback.

Avenues for future research

As mentioned, this can be tricky in crypto, since there’s limited historical data and information related to many projects out there, but you should do the best you can. As a result, there is no rule to stop companies from running away with investors’ money. Investors benefit from tokens as it provides access to the company’s product or service in advance. Review the project’s white paper and roadmap to see how the intended product or service will work, including when certain features will launch. South Korea and China decidedly imposed complete bans on ICOs around the same time, while Thailand issued a temporary ban on token offerings a year later as regulators drafted up a new legal framework.