Introduction – What is ICO?
You may be wondering, what is ICO and what all the fuss is about. ICO, or initial coin offering, is a fundraising method. It’s not a traditional fundraising method, where equities are given in exchange for funds.
Before we dive into what is ICO, I want you to imagine something.
One day you go to a cinema. You see a poster for a new, very exciting movie.
You want to buy the ticket for the movie, but the lady at the counter says, “Please buy the ticket first, and if we hit our box office target, we’ll make the movie.”
ICO projects are like that. They’re selling tickets to some of the most exciting shows on Earth.
If they hit their box office target, they make the movie.
So, what is ICO? Here’s what it is — it’s a method of raising funds on the Blockchain.
Before we discuss the ICO, here are several traditional methods of raising funds.
Traditional Equity-Based Fundraising Route
One traditional fundraising route is an initial public offering (IPO). In an IPO, investors get shares, and the business owner gets the funds for growth. The investors know, the shares can be worth much more once the company is listed.
Startups will be familiar with angel investors and venture capitalists. VC and angel investments involve the exchange of equity for cash. The equity involved is usually redeemable preference shares, convertible preference shares, etc.
What is ICO? It’s fundraising that doesn’t require you to give away equity.
The Kickstarter Crowdfunding Route
There are alternatives. For example, there is crowdfunding, which is quite popular nowadays. In the crowdfunding fundraising method, a website such as Kickstarter will list the project. Any interested person can contribute to the project to make it a reality. A threshold value is proposed, which triggers the project into “full steam ahead” mode, when contribution pledges exceed the threshold.
In the Kickstarter model, if the threshold is not met, the contributor’s pledge to contribute remains unclaimed by the project owner. The result is that the contributor does not pay anything and the project owner do not need to carry out the project. If the threshold is met, however, the contributors’ pledges are claimed, and the project owner will execute the project. The contributors will get their “rewards” for each level of contribution.
Kickstarter is a good platform for funding physical products, which can be given to contributors as their reward. Put another way, a contributor on a Kickstarter-type platform is in fact pre-purchasing the product, while helping to bring it to life.
What is ICO? It’s fundraising ala Kickstarter (TM) — but there’s a Blockchain involved.
The Equity Crowdfunding Route
The equity crowdfunding (ECF) route combines the Kickstarter model with the equity-based model. In fact, there are six ECF platforms in Malaysia. These include Ata Plus Sdn Bhd, Crowdo Malaysia Sdn. Bhd., Propellar Crowdplus Sdn Bhd, Eureeca SEA Sdn Bhd, FBM Crowdtech Sdn Bhd and Pitch Platforms Sdn. Bhd. Contributors are rewarded with equity in startups they invest in. The benefit is, they do not have to contribute large sums of money. Instead, they contribute whatever they are comfortable with.
What is ICO? It’s not equity crowdfunding, but crowdfunding without equity.
What is ICO as a Crowdfunding Method?
The ICO, or initial coin offering, is really a crowdfunding method.
A Blockchain-based startup that runs an ICO is telling the world, “I wish to raise money from selling my tokens, to develop my project.”
Whoever is interested can purchase the ICO tokens. The funds paid are called “contributions” and not “investments”, because ICO project owners cannot guarantee the performance of the project.
Usually, project contributors pay the project owners in cryptocurrency, such as Ethereum tokens (called “ethers”). In return, the project owners send the project tokens to the project contributors.
ICO tokens can have different types of rights, depending on the business model. There have been so many types of tokens…
- Tokens for access to the project platform
- Tokens to pay for services on the project platform
- Tokens to vote for the services on the project platform
- Tokens to pay for transactions on the project platform
- And so on.
ICO as a Token Distribution Mechanism
An ICO can also be seen as a token distribution mechanism.
Through an ICO, a project’s tokens will find their way into the hands of the general public.
The more people that have the ICO token, the more likely they are going to use it.
The more people use the ICO token, the more there will be demand for it.
That creates a virtuous cycle in which various players will acquire the ICO token, use the ICO token, and acquire it again.
With demand like that, it won’t be long before the ICO token goes up in price.
Some basic questions and answers – What is ICO
Here are some common questions that might come up, when you ask, “What is ICO?”
Q: Kickstarter has a minimum threshold before contributors’ pledges needs to be paid. Is this the case with ICO?
A: Most ICO projects do have this minimum threshold that needs to be “tipped” before the funds are released to the ICO project owners. This is called a “soft cap”. In case the contributions do not meet the soft cap (measured in cryptocurrency, not in USD) the contributors can ask for the return of their money.
So, failure to meet the soft cap is detrimental to the project. That’s why some projects say that they have no soft cap.
Q: Is there a maximum contribution that will be accepted by the ICO project?
A: Most ICO projects do have this maximum contribution. Once this amount is reached (measured in cryptocurrency, not USD) the project owners call it a day and stop accepting contributions. This is called a “hard cap”.
In very attractive ICOs, contributions flow in like a river, reaching the hard cap in a matter of hours, or even minutes!
Q: How do I know that an ICO is not a scam?
A: Lex Futurus are not financial advisors and we cannot vouch for the authenticity of any ICO projects. However, you can determine for yourself the authenticity of ICO projects based on their team members, their minimum viable product (MVP), their track record, and other factors. If they have credibility, skills, and experience, together with the technology in place, there’s a good chance that they are genuine.
If you do get scammed, you might be able to enforce your rights against certain parties.
Q: I now understand what is ICO. But why is ICO such a big deal, anyway?
A: For the startup owners, an ICO is a big deal because the startup owner retains full ownership of the startup company. No equity is given away.
For contributors, an ICO is a big deal because ICO tokens can greatly appreciate in value over time.
Q: I am interested to promote my own ICO project. What do you think?
A: We are interested to hear from you. We can help your ICO project become reality, if it passes our vigorous vetting process. If this is your question, reach out to us. We’d love to talk.