Initial offerings are the cryptocurrency world’s version of an IPO.
There are two main types of initial offerings:
- Initial coin offerings, or ICOs
As the name suggests, in an ICO investors receive an amount in a new cryptocurrency in exchange for their investment
- Initial token offerings, or ITOs
In an ITO, the project seeking funding doesn’t issue a new coin. Instead, investors receive tokens in exchange for their investment.
These tokens can be:
- Security tokens — traditional assets that have been converted into a tokenized, digital format on a blockchain-based platform.
- Utility tokens — assets that give the holder access to a product or service. For example, Gas coins grant their holders access to the NEO network.
While ICOs and ITOs are similar to IPOs in concept — all three have the purpose of raising money from the public — there are some key differences.
Firstly, most IPOs are launched by established companies seeking further growth. By contrast, ICOs and ITOs are typically launched to fund projects that are still in their initial stages. The project’s details are usually set out in a white paper on the ICO or ITO’s website.
Secondly, and more importantly, unlike IPOs, ICOs and ITOs do not usually grant investors an ownership stake in the project being funded. Instead, they give the holder of the coins or tokens other benefits.
For example, a token could give you preferential access to the product or service that will be sold once the project launches. Alternatively, you may be able to exchange the coins you acquire in the ICO at a profit if the project succeeds.
- The first initial offering was held by MasterCoin — now known as Omnilayer — in 2013. But ICOs and ITOs really took off in 2017. That year, there were approximately 50 initial offerings a month, which collectively raised $4 billion
- Brave Browser’s ICO in May 2017 raised $35 million in 30 seconds. But the highest grossing initial offering to date was launched by Filecoin, which offers decentralized cloud storage. Their ITO raised $257 million in one hour.
- ICOs and ITOs are largely unregulated, but they’re increasingly appearing on regulators’ radars.
In the UK, the Financial Conduct Authority has taken the view that tokens are ‘specified investments’ — and, so, regulated — if they grant holders some of the rights typically enjoyed by shareholders, bondholders, and fund investors. Similarly, the SEC considers some types of initial offerings to be ‘securities offerings’, which means they fall under its jurisdiction.
Want to know more?
This interactive map runs you through the regulatory status of ICOs and ITOs in 11 jurisdictions, including the US, UK, and Japan
Because the barriers to entry are low, ICOs and ITOs can be exploited by fraudsters and scammers. This excellent guide by CoinTelegraph walks you through the ins and outs of picking an initial offering to invest in, including how to spot red flags.
The Metaco view
“ICOs and ITOs could revolutionize entrepreneurship, because they open a route to getting exciting and potentially transformative projects off the ground to founders who wouldn’t be able to get funding via traditional means. The challenge moving forward is going to be finding a way to regulate the process and curb abuse without stifling cryptocurrencies’ original mission — democratizing finance for all.”