What is an ICO and is it possible to make money on it?

By issuing its own tokens and exchanging them for popular cryptocurrencies (for example, Bitcoin or Ethereum) or for fiat currencies (dollars or euros), the project attracts the funding necessary for launch or development. As a rule, ICOs are held in the early stages of projects, before the creation their complete infrastructure. The funds raised are used to finance the final stage of development, marketing, or go to special development funds to support projects in the long term.

Now ICO cannot be called both a legal and an illegal way to attract investments. Its legal status, procedure and requirements for companies that are going to raise funds in this way have not yet been determined in any country in the world. In addition, it is difficult to determine the legal nature of the relations that arise during an ICO. Since it is difficult to call such relations financial relations in their classical sense. At the same time, it is safe to say that this process is based on the reputation of the people behind the cryptocurrency startup and the trust of users (potential investors).

When a company wants to offer its shares to the general public, it conducts an IPO (Initial Public Offering – initial public offering on the exchange). ICO can work on a similar principle: investors, by investing, receive a “share” in the company in the form of cryptographic tokens. At the same time, ICO has common features with crowdfunding: funds, as a rule, are collected to implement a certain idea, that is, even at the stage when the project does not have a finished product.

At the same time, the IPO is regulated by national legislation. For example, in the US, to go public, a company must be incorporated as a joint stock company and registered with the SEC (Securities and Exchange Commission). All this makes the process of attracting investments in a project at an early stage of its development more difficult, but it provides certain guarantees to investors.

In the case of ICO, the process of attracting investments is much easier, but users are not insured in any way.

By purchasing tokens offered for ICO, investors first of all count on:

• Benefit from selling them at a higher price in the future (the classic example is Ethereum, whose tokens were worth less than one cent during the ICO in the summer of 2014, and today their price has risen to almost $400);
• Use the tokens for their intended purpose, receiving the declared services at a lower price.

Perhaps the biggest risk is the usual fraud, when the creators of the project pursue only one goal: to collect users’ money. In addition, since there are currently no laws that would regulate the conduct of cryptocurrency crowdsales, from the investor’s point of view, this transaction is always based on trust . It cannot be ruled out that the project may not survive to the stage of product launch or disappoint the investor with its implementation.

In addition, in their current form, ICOs tend to be held in one round, and they have little chance of receiving additional funding. This can also be seen as a potential risk in terms of the long-term existence of the project.

The abundance of various ICOs can confuse many inexperienced investors. Therefore, first of all, it is necessary to carefully study the Token Sale Agreement. When reading this document, curious details may come to the surface, which the organizers of the ICO may not have publicly announced. In addition, there are tacit indicators of the good faith of the project:

• The presence of all necessary agreements and rules published on the website as a public offer.
• Finished working prototype.
• Competently composed whitepaper and other documentation.
• The presence of an escrow (a special conditional account on which property, documents or funds are taken into account until certain circumstances occur or certain obligations are fulfilled).
• Incorporation (registration) of the company itself.
• The spotless reputation of the people behind the project.

You can read more about the legal aspects of ICO here.

The success of an ICO is a rather conditional thing. However, the generally accepted indicator is the amount of funds raised. In this regard, the leadership at the moment (we are talking about dry statistics, leaving aside other possibly controversial aspects of the campaigns) belongs to the Bancor project, which in June 2017 raised 396,720 ETH in less than three hours. An example of another rapid crowdsale was the campaign of the innovative Brave browser: in about 30 seconds, the project managed to reach its financial goal and raise $35 million.

In May 2017, the list of successful cryptocurrency crowdsales was replenished by the Storj ($30 million in less than a week) and Aragon projects – in just 15 minutes from the start of the ICO, the project raised the planned 275,000 ETH (about $25 million).

You can also recall the projects mobileGo ($53 million), Gnosis ($12.5 million in 10 minutes), Blockchain Capital ($10 million in two hours), Aeternity (23.4 CHF) and, finally, the project that led to the failure of the Ethereum network Status (about $100 million).

Also, do not forget about The DAO project, which has already become part of the history of the cryptocurrency world, as a result of the collapse of which Ethereum Classic appeared in the summer of 2016.