An ICO, or “initial coin offering”, is in many respects similar to an initial public offering. It is a fundraising tool that trades a future cryptocurrency in exchange for some existing cryptocurrency. Essentially, the ICO is raising money in the form of bitcoin or other cryptocurrency.
Unlike an initial public offering, ICO’s are not regulated by any government nor do they offer any ownership stake in the company. The participants in an ICO only receive some amount of the future cryptocurrency, typically called ‘tokens’, and hope the value of the new cryptocurrency will rise in the future. These tokens may also represent an ownership stake or royalty in the specific project.
Many ICO’s take advantage of Ethereum’s smart contract system. A participant will send funds to a smart contract, which will then distribute the correct amount of new tokens to the participant at a later point in time.
2017 saw an explosion in the number of ICO’s available. It all started with the success of Mastercoin (now rebranded to Omni) in 2013. Ethereum would soon follow in 2014, raising just over $18 million, the largest ICO at that time. However, while there are many success stories following an ICO, history also warns of many coins that were unable to hold onto their initial value, or were outright scams from the beginning.
Since ICO’s are generally not regulated, there have been a number of examples of scam artists putting together some great marketing material making promises that were quickly broken. Both the immense success of many ICO’s, as well as the questionable legitimacy of others have garnered governmental attention around the world. In the United States, the Securities and Exchange Commission has ruled that if the token issued in an ICO is a financial security, then the ICO is subject to regulation, though what constitutes a ‘financial security’ still remains to be clarified. Other countries have considered banning or have already banned ICO’s.