Initial Coin Offering (ICO)

Understanding Initial Coin Offering (ICO)

An Initial Coin Offering (ICO) is a method of fundraising utilized by cryptocurrency and blockchain companies to generate funds for the development of apps, services, or new coins. ICOs gained significant popularity during the cryptocurrency boom of 2017 and are similar to initial public offerings (IPOs) in the traditional financial world.

However, ICOs have faced criticism due to concerns about potential scams and market manipulation. The U.S. Securities and Exchange Commission (SEC) has taken action against certain projects that were selling unregistered securities.

The process of an ICO typically starts with the release of a whitepaper that outlines the project’s objectives, the number of tokens to be created, and their distribution. Early investors may receive discounted prices for purchasing tokens during the initial stages of the campaign. Additionally, using cryptocurrencies for purchases instead of traditional fiat currencies can also result in discounts.

Tokens sold through an ICO may provide utility, allowing owners to exchange them for access to specific products or services. In some cases, tokens may represent ownership stakes in the startup that initiated the ICO.

ICOs have gained notoriety for their high-risk nature, with some even being identified as exit scams. Research conducted by the Review of Financial Studies revealed that ICOs globally raised nearly $13 billion between January 2016 and August 2019. However, a report by Ernst & Young found that 86% of the leading ICOs launched in 2017 were trading below their listing prices by October 2018.

One of the main criticisms of ICOs is the lack of regulatory oversight, which makes it easier for inexperienced investors to participate. As a result, alternative fundraising methods such as initial exchange offerings and security token offerings have gained popularity in recent years.

The SEC has taken action against several projects, including Telegram, which was ordered to return a significant portion of the $1.7 billion it raised for the Telegram Open Network to investors. In March 2020, the District Court for the Southern District Court of New York issued a preliminary injunction requiring Telegram to return $1.2 billion to investors and pay a civil penalty of $18.5 million.