ICO fundraising… IPO fundraising… What’s the difference?

22 September, 2017
by: Cripps Pemberton Greenish

What is ICO fundraising, and what sets it apart from IPO fundraising?

Most people are now familiar with the term IPO (initial public offering) (not to be confused with “Intellectual Property Office”), where a company transfers from private to public status and investors gain shares in the ownership of the company as part of the process, however, many are unfamiliar with its cryptocurrency counterpart – an ICO.

So what is an ICO?

ICO is the abbreviated term for “Initial Coin Offering” (not to be confused with “Information Commissioner’s Office”) a new unregulated fundraising phenomenon that appears to offer a transparent and speedier way to fundraise than traditional methods (such as share issues or loans) through the use of digital currency. ICOs have rapidly gathered momentum in 2017, more than 90 have taken place already this year.

How do they work?

Typically, an ICO involves selling digital currency via platforms, such as “Ethereum”, often referred to as “tokens” or “coins” to investors as a way for a company to raise money to fund future business development. Each “coin” or “token” contains rights, for example: the right to vote on business decisions or the right to receive a share of future earnings. Ultimately, if the digital currency purchased gains in value, in the same way that shares do in the public market, the investor will realise a profit.

What are the downsides?

There are risks however, mainly from the high potential for fraud, legal ambiguities and the lack of formal documentation provided at the time of investment.

From a legal perspective, the official status of an ICO is currently undefined and hence ICOs in most jurisdictions (including the UK) are not yet regulated. The benefit of this is that they can often be completed quickly, without paper and the red tape associated with other fundraising routes. However, the risks associated with ICOs mean that they are very much on the horizon of financial regulators in many jurisdictions. In the UK, for example, The Financial Conduct Authority (FCA) has issued a warning, labelling the offerings as “very high-risk speculative investments.”

What next?

Overall, ICOs seems to be a revolutionary fundraising method, likely to change the fundraising landscape beyond recognition. Undoubtedly regulations applicable to such offerings will tighten over coming months and years, however, if the regulations imposed are flexible enough to accommodate and encourage growth of this innovative concept, is it possible that ICO-generated digital currency will become the stocks and shares of tomorrow?

For more information on fundraising, please contact Laura Wilson at laura.wilson@crippspg.co.uk or on +44 (0)1892 506 047

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