There has been some discussion regarding the difference between initial coin offerings and initial public offerings. It is evident the two have some degree of similarity on paper, even though they are two entirely different concepts in reality. In fact, one could argue the two ideas couldn’t be further apart from one another right now. IPOs and ICOs aren’t two peas in a pod, as they don’t even grow in the same garden.
Initial coin offerings have been all the rage for the past few months. This new form of crowdfunding has genuinely taken off and is now worrying regulators all over the world. This latter point is only to be expected, as we are dealing with a severely unregulated industry to begin with. Anyone can set up an ICO and raise money with it, without having to adhere to regulation or any other requirements. This situation isn’t sustainable by any means and needs to be addressed sooner or later.
Moreover, one has to keep in mind that ICOs are all about creating money out of thin air in most cases. Hardly any ICO projects have a working product before they receive money, which is a legitimate concern most people are willing to overlook right now. A whitepaper is nothing more than a document filled with empty promises which may or may not come true in the end. If they don’t come true, there are no real repercussions for the team whatsoever, as there is no one with the authority to “punish” them.
Whether or not the ICO industry will survive for much longer is anybody’s guess right now. We still see dozens of these projects introduced every single month. Maybe one in ten will eventually succeed, although the final tally will probably be a lot lower. It is evident this situation is a powder keg waiting to explode, although no one knows for sure when that will happen.
Initial public offerings have been around for quite some time now. They allow private companies to raise money by offering stock to the public. In this regard, they are somewhat similar to ICOs, but that is where any similarities end right away. Both new and established companies will initiate an IPO when the time is right, which creates a lot of interesting opportunities for all parties involved. An underwriting firm helps companies decide which type of security to issue as well as the best offering price.
In the ICO world, however, companies just sell as many tokens as they like for the price they think is best. Raising a lot of money is usually the only objective, as most expenses can’t be justified immediately. These decisions can be made within minutes, whereas setting up an IPO requires a lot more work. There is a set of very specific steps which need to be followed, including the formation of an external IPO team. Companies must also have a financial performance report before even considering its initial public offering listing.
Any company without a proven track record has no chance of hosting an IPO, which is why it will often choose the ICO method instead. Moreover, companies initiating an IPO must file financial statements for a proper independent audit and file a prospectus with the SEC. This doesn’t mean an IPO is any less of an investment risk than an ICO, mind you. However, it is evident IPOs are far more “legitimate” than ICOs due to the lack of regulation and requirements. Plus, there are far fewer IPOs than ICOs, and an abundance of initial coin offerings isn’t necessarily a good thing. Indeed, an ICO is nothing like an IPO in any way.