What is ICO

Initial Coin Offering (hereinafter – ICO) in English means an initial offering (sale) of coins to investors and is a form of raising funds for IT projects (startups). Usually, such sales take place in the cryptocurrency “etherium,” and less frequently in other digital currencies, with the IT company receiving real money from investors in return, usually U.S. dollars.

In an ICO, the issuer of coins, or tokens, receives the necessary investment to develop its project, offering investors in return certain services in the future, such as software. In addition, investors can also expect to receive dividends if the business is profitable, as well as income from the sale of purchased tokens if their value increases.

Advantages of ICO

It is worth noting that the world has not yet developed legislation regulating the issue of ICOs, so any individual or legal entity can place tokens. In this case, no audits or official reports are required, as in the case of an IPO (initial public offering), which makes this method of attracting investment very attractive for IT companies.

The ICO entry threshold is usually minimal, in addition, the project assumes absolute anonymity, i.e. not only other transaction participants, but also the tax authorities will not know about your investment in the startup. Moreover, there were cases when the profit from such investments due to the rapid growth of the token price amounted to hundreds or even thousands of percent per annum (Ethereum and IOTA projects).

Stages of ICO

The ICO process itself, or as it is also called crowdsale, usually has the following steps:

1. Pre-acquaintance – an IT company presents its project and assesses the interest of potential investors in investing funds. As a rule, this is done by posting news, press releases on specialized websites and forums, as well as by participating in IT conferences and exhibitions
2. Conducting a pre-sale – Tech companies sometimes conduct a pre-sale ICO before the main sale. Usually this event is not advertised as heavily as the main sale, and tokens are sold at an undervalued price. The company can use the proceeds to increase its investment from the main ICO, such as allocating money to refine a software prototype or conduct a marketing campaign
3. The offer is a more detailed proposal for investors. It specifies the technical description of the idea, the terms of its implementation, the required amount of investment, the volume of token issuance, etc. For this purpose, a project website is created or a more detailed presentation is prepared
4. The marketing campaign is aimed at informing the maximum number of potential investors about the startup and increasing the value of the project by advertising the future benefits for investors and users of the software being developed
5. The start of token sales (or crowdsale) is the final stage of the ICO. Usually startup tokens can be purchased on the website of an IT company, and for promoted startups – also on the websites of cryptocurrency exchanges

Who can get the status of an ICO investor?

Invest in cryptocurrency ICOs can both private traders and non-professional players in the market.

At the same time, you need to consider what is the ICO in cryptocurrency, as well as the following nuances:

• The ICO does not give an investor the right to claim a stake in the company.
• It is not a guarantee of a quick and stable increase in capital.
• ICO is not regulated by the state and is not subject to applicable law.
• Individuals who buy ICO currency cannot participate in the company’s decision-making.
• There is a risk of falling for crooks.

Why invest in ICO tokens

By purchasing tokens issued by the project, investors expect:

• Gain from reselling the tokens at a higher price in the future (assuming that they will be in high demand – for example, because the project will “shoot out”).
• Use your coupons in the future, getting (supposedly) services at a lower price.
• To support a project that is interesting to you.

If the ICO is another crowdfunding model, how can I be sure that I will not be cheated

There are absolutely no laws regulating ICOs – not in any country in the world. An ICO on the buyer side is a transaction based on trust. As with crowdfunding, the project may not survive until the product appears, or once it does, it may be a complete disappointment to you. Finally, some enterprising scammers can simply trick you by conducting an ICO for a project they never intended to develop.

Nick Tomino, a cryptocurrency enthusiast and head of Runa Capital’s San Francisco office, pointed out in his blog back in 2016 the irrational behavior of many investors during ICOs. Projects with only a website and a knee-jerk business model concept have raised several million dollars in a matter of hours or days – while many really working promising projects with cash flow and clients cannot raise similar amounts.

Tomino believes that a bona fide project should:

1. Prove to potential investors the validity of the ICO and the validity of issuing their own cryptocurrency.
2. Disclose plans for project development and have an open dialogue with potential investors.
3. Implement a test version of your own protocol before the ICO.
4. Provide the ability to directly “mine” currency to engage new users and provide the network with the necessary resources to process transactions.
5. Go to the ICO with a clear understanding of how much you need to attract.
6. The founding team must own 10% to 50% of all tokens and must not exchange them during the first three years of operation.

Some ICO projects involve a third party, a kind of arbitrator, who can count on the trust of investors to mediate between them and the projects. Others form legal entities and bind themselves to restrictions on the ability to spend funds raised through ICOs.

It is also good form to disclose the key participants of the project (at least part of them, as a rule, are active members of the cryptocurrency community), and no significant ICO does not do without the published description of the idea, the business plan of project development and publication of expert evaluations.

The vast majority of projects gather contributors under their banners under the slogan “X will create a decentralized Y.” Whether there is an advantage to decentralization of this service or tool, what it is, whether the company will be able to compete with its centralized counterparts, having gained momentum – these are probably the most important questions that future ICO token buyers should ask themselves.

How to find a project for investment and participate in the ICO

You can invest in any project directly on its website, but you need to have a wallet with bitcoins, ethers, or other cryptocurrency, as well as the ability to make transactions. You can start a wallet, for example, here – then everything works about the same as with any transfer system or online bank.

Information resources on which you can find projects conducting ICOs, a lot – already mentioned Smith & Crown, ICO Alert and others.

AngelList and Protocol Labs have recently decided to launch a new platform Coinlist – a specialized platform for launching ICOs, for which, in particular, they are working on a contract base (and, of course, it will immediately carry out screening of projects) – it is not clear who can invest through it, but for the unsophisticated investor it will certainly be a friendlier solution.

What should I pay attention to when investing in an ICO?

The lack of legislative regulation and interaction of transaction participants online makes investment in ICO quite risky, and that’s without taking into account the fact that the startup can simply go bankrupt or the project can be hacked (for example, hackers managed to withdraw more than $30 million from the startup “DAO”). Therefore, before investing personal savings in such a project, you should consider the following:

1. The managers of the company must have relevant experience and an impeccable reputation
2. The startup itself must be officially registered as a legal entity
3. The idea of a startup must be clear, have value for future users, and be promising. Having a working prototype of future software reduces the risk of investment
4. It is necessary to carefully read all the agreements and rules of the future transaction, which IT companies often place on the project website in the form of a public offer
5. A competent whitepaper – a presentation of the project with a detailed description of the technical and marketing details of the startup
6. A clear road-map with a description of the stages of project development and their compliance by the startup
7. The project has an escrow account, which means that funds will be credited to the startup only if the IT company fulfills its obligations

All this will also help to weed out scams – fraudulent projects that aim to raise funds through crowdfunding for the personal enrichment of their owners without the subsequent implementation of the idea. So scam Ebitz managed to raise 240 bitcoins (about $2.5 million) through ICO.

How to conduct an ICO for your project

It’s not hard to do, for example, here. That’s if you want to play. It’s harder to figure out why you might really need it.

If you do need to, you will probably spend most of your time developing and selling your project anyway, rather than preparing for an ICO release. Besides, all “fast” ways assume creation of currency, which resembles bitcoin in its mechanism of work, which, let us say for short, has certain disadvantages for the case when you want to create “project” currency (bitcoin, generally speaking, as one of the first experiments of its kind, has some inherent defects in its mechanism, which developers hope to fix with time).

If you want to put coupons like “one hour of help around the house” into circulation, either cut paper or learn to program – such a homegrown currency system probably won’t help you.

Is it possible to make money by investing in ICOs?

The unequivocal answer is yes. But the risk of losing the invested money remains high. Therefore, experts recommend carefully analyzing the ideas and goals of the programmed enterprise, to assess the team of the overall project, as well as to study the degree of confidence in it from other market participants.

At the moment, the ICO is a fairly effective way to attract investment, even if the implementation of not all projects is not successful.

Parameters to consider during the analysis of the project:

1. The market, which largely determines the scale and development potential of the project. The ideal situation is as follows:

• A market with great development potential that already has sufficient volume, or a unique market.
• Low level of competition or lack thereof.
• It is predicted that the project will take a significant share of the market.  

2. Product. The value and potential of the idea itself can only be evaluated subjectively. Properties of the ideal product (at the time of the ICO):

• Unique idea, proper use of blockchain, open source code.
• A solution to a current market problem.
• The technical component is competently described in the whitepaper.
• The market is ready for the product now or will be ready in a couple of years.
• The problems of other blockchain projects do not affect the performance of the product.
• The community speaks positively about the product and sees value in it.

3. The role of the token. An important point for any investor, which directly affects the profitability. Now it is difficult to single out the best token model, but it is possible to describe the necessary properties:

• It has a functional application within the network, which in turn cannot work without a token.
• Along with the development of the project, the demand for tokens among network participants is growing.

4. current achievements. They help to understand what the team’s main goal is – to launch a specific product or to earn money at the ICO, and whether the team can work without major funding. Significant achievements before the ICO reduce the risk for the investor. Examples of such achievements:

• The alpha version of the product is in the public domain;
• Presentations at conferences;
• Valuable partnerships.

5. Roadmap. Information from the roadmap will tell the investor when to expect activity in the market. It is the achievement of key milestones that usually leads to a significant increase in the price of a token. The ideal roadmap contains a detailed description of development milestones with a financial component. In this case, the team has a good understanding of how it will move towards its goal.
6. Team. For many investors, this factor is the main indicator of the continued success of the project. A good team can change the product or come up with a new one in a pinch, and a bad team can fail even with the best idea. The ideal team at the ICO stage includes:

• People with experience or expertise in the chosen market (it is difficult to make a product for lawyers without the participation of lawyers).
• Blockchain developers.
• People who will take over the business processes (operations, finance, scaling).
• CEO with managerial and entrepreneurial experience.
• Advisory board, which complements the team on the above points.

7. Terms of the ICO. Here you need to pay attention to 3 components: the boundaries of the ICO, the conditions of the ICO, the distribution of tokens. There is no correct format, depending on the specific crowdsale conditions may vary significantly. Positive points for each of the components:

• The minimum and maximum amounts a project can raise correspond to its scale. This means that if the project does not reach the minimum amount, all funds will be returned to investors, and in the case of complete success it will not receive “extra” money. A big plus if the team can justify the boundaries of the ICO, not just indicate the direction of the distribution of funds raised. It is even better if the funds are given out in installments as certain milestones are reached.
• Conditions prevent the concentration of tokens in the hands of the largest players (whales).
• The distribution of tokens is specifically justified by the team, with a small percentage (15-20%) going to the creators. The team will not be able to sell tokens for a long period of time.

After studying the project, it is worth thinking about an investment strategy. There are two main ways: sell tokens immediately after going public, or keep them in anticipation of the future development of the company and multiples of the token growth. Both strategies will work if the investor realized during the analysis that the ICO is worthwhile and the project has great potential. However, their specific results depend on different factors. Let’s list those that affect the growth of the price immediately after going public:

• There are not enough tokens for all investors. Anything that potentially creates a shortage of tokens at the ICO stage increases future demand when they appear on the exchange.
• Many investors believe in the project. The higher the potential of the project is assessed by the total mass of investors, the greater the chance of a price increase.
• The team conducts a quality marketing campaign (only if there is an upper limit). Then more investors will know about the project, will want to buy tokens.
• Tokens will be available on the exchange not immediately. The longer the pause after the ICO, the greater the chance of rapid growth after the start of trading.

Let’s also list the factors for long-term price growth:

• The team is active. Investors appreciate the project more if its creators are active in social networks, talk about current tasks and plans for the near future.
• The team achieves results. This can be the implementation of conceived functions, new partnerships, customers.
• The project has potential for development. The more and faster the project can grow in the future, the higher the investors’ estimate at the moment.
• The token fulfills an important role. If the functional (not speculative) demand for the internal currency is directly related to the development of the project, the token has high potential.

All of these factors are closely related to the project analysis criteria (team, market, ICO conditions, etc.). They can be used as control questions before investing.

ICO in the world

The first ICO was held by Mastercoin (now called Omni) in 2013, when the firm managed to raise $5 million for its IT needs. However, this is not the largest amount of investment raised in an IT project. For example, the innovative browser “Brave” managed to raise $35 million in 30 seconds. In May 2017, in less than a week, the project “Storj” brought its developers $30 million in investments. And one of the record-breaking startups is “Status” – more than $100 million. IT IS ALSO ONE OF THE RECORD-BREAKING STARTUPS, STATUS, WITH MORE THAN $100 MILLION IN INVESTMENTS.

However, not all experts are optimistic about the prospects of investing through ICOs. For example, many of them compare the wave of cryptocurrency ICOs to the boom of Internet firms in the second half of the 1990s, many of which “burst like bubbles” in 2001, leading to the “dot-com crisis” and the collapse of investment company indices in developed countries.

Examples from recent most successful ICOs

Tezos is a potential “killer” of the airwaves. The Tezos team is about to create a powerful and unique technology that will meet the most stringent requirements needed to enforce smart contracts in the public registry. Tezos developers have created a proprietary language that ensures computer code fidelity in a smart contract with mathematical precision.

Raised: $206 million (in 4 days)

EOS is a platform for creating smart contracts. Designed to perform multiple tasks in parallel, it is an entire operating system for blockchain-based applications. In addition, this service also positions itself as an alternative to Ethereum.

Raised: $170 million (in 5 days)

Bancor is a platform on the basis of which it will be possible to exchange any existing coin via Bancor token. All this will happen at a much lower cost than any exchanges and exchanges.

Raised: $153 million (in 3 hours)

Do not do without mentioning unsuccessful ICOs, among these we can highlight the following:

The DAO is probably the brightest example of a failed ICO and once again proves that successful fundraising does not guarantee the further success of the project. Initially, the founders planned to create the first decentralized venture capital fund. It was planned to use the cryptocurrency Ethereum for calculations. The fund began its work, but because of a technical error in the code of its smart contract, an unknown hacker managed to steal about $60 million from the accounts of The DAO. Later, through the efforts of Ethereum developers and users, the funds were recovered, but the price was the Ethereum network split and the emergence of Ethereum Classic.

CoinDash – the crowdfunding campaign of the startup CoinDash ended after it became known that the purse posted on the official website of the project was substituted by unknown hackers, so that all the funds of users who participated in the ICO, were transferred to the purse of the intruder.

Regulation of ICOs

The legal status of the IPO, the procedure and requirements for IT companies at the moment is not regulated by the laws of any country in the world. This makes this area of investment attraction as a simpler and more accessible way, as well as more risky.

At the same time, legislative regulation of ICO is necessary for its development, and some steps in this direction have already been taken. For example, in September 2017. The Australian Securities and Investments Commission published guidelines on legal obligations for firms that crowdfund. . However, in the same year, the governments of China and South Korea completely banned the attraction of investments through ICOs.

Frequent Questions