What are the differences between crypto ICOs and IPOs? Every business needs to raise capital to grow. This is the basic tradition that has been followed long before cryptocurrencies and blockchain came into existence.
Now that they are there, companies make Initial Coin Offerings or ICOs for the same apart from making Initial Public Offerings or IPOs.
There are significant differences, both fundamental and beyond, between them which are all enlisted in this article for your knowledge.
Typically, an ICO is a process in which the applicants receive digital units of value that are newly created. This they do in exchange for an investment made by them.
This is quite a popular process typically among the blockchain enthusiasts. Check out Differences Between Cryptocurrency and Bitcoin.
The ICOs are as attractive as IPOs wherein the shares of a company are not required to be listed on a stock exchange as in IPOs for the transitioning of the company from privately owned to a public one.
In IPOs, the investors do not have the right to sell their shares off at any point in time. When they do, the value of the shares will be typically determined on the basis of the financial performance of the specific company.
7 Differences Between Crypto ICOs and IPOs
Though an ICO and an IPO may sound the same, especially to a beginner, there are lots of differences between them.
Here are some of them which will help you to make an informed decision as to which approach you should pursue for raising funds for your company.
1. The Process
As for the IPOs, in the process of fundraising, the company moves from a private entity to a public entity. The entire process is highly stringent and the applications need to undergo a set of regulatory obstacles.
In addition to that, the process also includes making independent audits, analyzing the past financial performances of the company, and, most importantly, it needs to have an approval from the Securities and Exchange Commission or SEC to go forward with the IPO.
As for the ICOs, the entire process is different right from the very beginning. Ideally, anyone can make such an offering. All it requires is a whitepaper and a website.
It is an act that is primarily restricted to the crypto companies and the amount to be raised is determined by the company itself according to their requirement.
The most significant difference between an ICO and an IPO is that it does not need to go through the traditional red tape as an IPO because it deals with an unregulated market.
2. Ownership of Company
As said earlier, in an IPO, the investors purchase the shares of the company. This actually means that they purchase a stake of that particular company that is making the offering.
Along with this right, they are also eligible to get a share of the profits made by the company in the form of dividends, mostly annually. Apart from that, they also get the voting rights regarding business development and operations with their investments and their rights are proportional to the number of shares they have purchased.
In comparison, in the crypto world, when an ICO is made the investors do not own any stake or share of the company making the offer. They have no say in the business operations or have any claim on the profits earned by the company making the offer.
It is simply that they own the specific tokens of the specific company that they can trade on an exchange at a later point in time as and when the prices rise or fall on the basis of the market forces.
3. Investment Instruments
The investment instruments involved in an ICO and an IPO are also significantly different. In an IPO, the investors are offered shares of the company that wants to go public from private.
They purchase these shares by using real money such as the US Dollars, Euros or Yen. This means that the company making the offer can access the capital immediately after the offerings are finalized.
On the other hand, while making an ICO the company cannot accept fiat currencies due to the regulatory restrictions imposed on them. Instead, the companies request the people to make investments in established cryptocurrencies only such as BTC or ETH to fulfill the offering.
These coins can be traded on a public exchange at some point in time for real money which allows the crypto company to spend the money raised as capital according to their requirements.
4. Risks Involved
The chances of a company making an IPO to be involved in any sort of illegal activity is minimum. This is due to the regulatory oversights imposed on the IPOs by the SEC.
This raises the confidence of the investors in the company who know that the regulators have performed their job well to enhance due diligence even before the shares are listed on the exchange.
This ensures the legitimacy of the company as well as its offerings. Since all the shares offered in an IPO are listed and verifiable, the investors trust its performance which helps in making their investment decision.
However, in comparison, there is no such guarantee offered in an ICO, unfortunately. It is entirely based on the principle of good faith wherein the investors can even put in their money on an ICO that does not have any underlying tokens.
However, there are lots of instances where tokens have failed to take off and there are also lots of crypto projects that turn out to be a scam and the companies making an ICO do not fulfill any of the promises made by them in the white paper.
A lot of companies also went missing after they raised their capital. For that reason, you are required to know about those ‘Ponzi’ schemes and ‘pump and dump’ schemes before you go ahead with an ICO. Therefore, ICOs are riskier than IPOs.
IPOs can be introduced when a business is running successfully, is financially stable and established. An IPO is good for companies that need long term capital and not funds for developments. Ideally, companies go for an IPO when they are absolutely sure about what they are getting into.
In comparison, ICOs are best to introduce at the earlier stage of the business. This is when the company does not have a concrete plan for development or have adequate funds to hire employees, buy equipment, or market themselves and do anything that is necessary for a successful launch of the company.
6. Pros and Cons
The benefits offered by an IPO include reliability and regulation. You typically invest in an asset that is known to you and without any tall promises and expectations assured. There are legal requirements in it that offer a complete peace of mind to the investors.
It is easy to ascertain the real value of the company since all records and information regarding the company are available in the prospectus. IPOs also increase business exposure and opportunities by going public and also give a chance to recruit top talents by offering several impressive benefits apart from the stock options.
And, a public company has a better reputation than private companies because these companies are usually considered to be bigger and more efficient than their private counterparts.
However, the downsides of IPO include complications in the registration process, long drawn process, and limitation to country and coin amount. It is also an expensive route because there are several fees for filing, underwriting, reporting, and more.
And, since the performance of your company will be reported every quarter you may feel some pressure to perform well in order to keep the investors happy by providing regular and handsome returns.
The benefits offered by the ICOs, on the other hand, include little or no legal requirements, faster process, easy to launch, and no limits or chain to follow.
Here, the investor is the sole decision maker as to how much risk to take and control of their assets. This is also a very liquid option for the investors because they do not need to lock their money up for a long time which is 90 to 180 days in the case of an IPO after which they can sell their shares.
7. Other Differences
If you intend to organize an ICO you will need to employ some programmers and use the internet to create your ICO. In comparison, for an IPO it will need banks and lawyers to create the platform for raising the necessary funds.
If you want to make an investment in a foreign company in an IPO, you will need to go through some additional legal procedures as well as need to use the services of a broker.
On the other hand, in the case of an ICO, you are allowed to buy any type of token from any company in any country without needing to go through all these hurdles.
The Initial Coin Offerings are comparatively new and are therefore at their state of infancy while the Initial Public Offerings have been in the market for decades now.
ICOs typically use cryptocurrencies and operate on blockchain technology. Since these are unregulated, ICOs do not need to issue any prospectus. Simply issuing a white paper is enough for it.
The positive side of it is that there is no restriction in the number of coins released by the ICO which in turn increases the funding significantly.
In comparison, the IPOs need to be regulated and issue a proper prospectus for the shares issued. The number of shares offered is also limited which limits the amount of capital raised.
The tokens offered in an ICO may not offer ownership of the company as the IPO but it becomes an essential part of the ecosystem which promises huge growth which is much more than the stocks offered in an IPO. However, this happens only when the usability of the tokens in the system and the supply of them create a sufficient demand.
The ICOs can employ smart contracts since these operate on the blockchain technology unlike the IPOs. This means that the ICOs do not need any interaction by humans during the process but can still issue the right number of coins to the investors even in the absence of regulations and trust. As for the IPOs, there is no such mechanism available.
In terms of accessibility, IPOs are not accessible to everyone. Typically, the market is dominated by people having huge funds at their disposal and by institutional investors.
However, as for the ICOs, on the other hand, it can be accessed by any average investor which is due to the fact that it is based on the decentralized blockchain once again. This means that the investors only need to comply with the laws of the region where the coins are being offered.
As for the duration of the offer, the ICOs definitely score over the IPOs. This is because the ICOs simply need a working blockchain to start their campaign and issue their coins simply and instantly.
In comparison, due to the extensive formalities involved in an IPO, it may take at least 4 to 6 months by a company to start a campaign.
When it comes to the allocation of the ICOs, there is no control due to the decentralized nature of the blockchain. Depending on their ability, anyone is free to buy as many numbers of tokens as they want which is why there is a significant increase of whales in the crypto market who control the prices.
In comparison, the IPOs however come with proper control and regulation which ensures fair allocations of the assets by using different methods.
IPO is an ideal investment only if the company issuing them is in your country. This will keep things pretty straightforward in comparison to buying shares of a foreign company for which you will need to use a broker and meet additional requirements.
Investing in an ICO, on the other hand, only needs access to the internet thereby making it quite a breeze no matter from which part of the world you invest in it. However, this is not applicable in the countries where cryptocurrencies are banned or on the securities for the US.
Which is Better to Pursue – ICO or IPO?
An ICO is a process where a crypto startup typically offers a considerable pricing discount on their coins in exchange for major crypto coins such as Bitcoin or Ethereum.
The company gets its required capital and the early contributors get the chance to diversify their crypto portfolio apart from the pleasure gained by making a donation to a promising crypto startup.
The company may sell a part of the coins collected to convert it into traditional currency.
With the differences enlisted above, it may seem that an IPO is much better and secure than an ICO due to the regulations it needs to undergo.
Well, though it may look so, it is actually not true. If you can only choose a promising ICO project after a thorough research, your investments can also be quite profitable.
Typically, crypto experts and market critics believe that ICOs are way better than the traditional IPOs and there are a number of good reasons for that.
First, the benefit for the company making an ICO is that they do not have to exchange equity in the process as in IPOs wherein a bulk of the company ownership needs to be given away.
Secondly, the IPOs need a lot of time to launch because it needs to go through a lot of stringent securities regulations.
This means that the companies may miss out on the best opportunities and times offered by the market. Whereas, ICOs are an unregulated event and therefore can be launched anytime though there are several such companies that choose not to allow US investors for their ICOs.
Over the years, ICOs are gaining a lot of popularity among the investors in spite of the non-regulatory nature of it. This is due to the benefits that it offers which include:
- Faster distribution of the coins
- A shorter process
- Allowing any common person to take part in it subject to legal conformity and
- Good prospects of growth in the value of the coins.
However, a lot of research is required by the investors personally in order to avoid being scammed, which is common with ICOs, and to judge the credibility of the ICOs from an expert.
Over the years, the hype on digital currencies seems to have gone down and now more and more regulations are being imposed in this particular field.
It is not surprising that there are even a few ICO projects that have listed their token already with the SEC as securities. Add to that, it is due to the speed and flexibility that the ICOs come with that makes people go for it.
Investors, of any level, believe that ICOs are more valuable than IPOs due to the decentralized nature of blockchain. The small and average investors need not worry because the big investors will rule in their support.
Anyone, whether it is a startup or an established crypto company, can raise funds through an ICO and it is convenient for them to do so because it is very easy to evaluate.
It is the structure of the coin itself that determines how much benefit the investors can reap from an ICO. Typically, there are lots of avenues in which business ventures can make money through this system.
ICOs are more reliable to raise funds and can improve innovation and come with a lot more use cases.
However, the malicious users and scams do tarnish its reputation a bit but with more control, it will be much safer than before as and when the blockchain becomes more secure and regulated.
It is for all these reasons that the ICOs are now becoming mainstream and main deal in spite of the fact that it is operational for a much shorter time period in comparison to the IPOs.
With decentralization and the ease of investing they are surely equally favored by the investors in the crypto space.
Though both ICOs and IPOs will give you a chance to raise capital and invest in your business it is the stage in which your organization is that will determine which approach you should take.
For any startup company, making an ICO is much better and more feasible since they are not ready for organizing an IPO.
However, with an ICO, they can raise funds easily with minimal commitment. It is much easier for them to achieve their short term goals, especially through an ICO.
On the other hand, if your business is quite mature and has a tall private valuation, an IPO may be just the right option for you to raise funds for your business capital.
Therefore the answer to your question, which among ICO and an IPO is better to pursue entirely depends on your business goals and its stage.
However, the way crowdfunding and ICO campaigns are gaining popularity among the businesses it is more likely that the traditional process of funding businesses via IPOs may be a thing of the past pretty soon.
The vast outreach of the ICOs over IPOs and their efficiency has raised the interest. With proper regulation, the growth of the industry will be unstoppable which indicates the bright future of the ICOs.
At this point, it can be said again that the IPOs are very much regulated by the government but the ICOs are not.
As a result, the ICOs are typically an aspect that is restricted to the businesses within the crypto space. Also, it seems that the Securities and Exchange Commission as well as other governing bodies and lawmakers are keeping a close watch on the ICOs.
This means that the chance of a new legislation being introduced soon by the government banning them altogether is not overruled completely.
Besides the fact that ICOs and IPOs offer businesses a chance to raise capital, there are no similarities between them. Through this article, you have come to know the differences and now you can choose the better one among the two.