Everyone who is familiar with stock exchange trading and investments in companies’ shares knows the concept of a public offer of shares. It is Initial Public Offering, and the well-known term IPO appeared. In the process of conducting an IPO, a previously privately held company becomes public and sells its shares to all investors. Thus, it receives funds for business development, and investors become co-owners of the company and receive their share of profits. IPOs are usually conducted by companies that have successful business and are widely known.
Considering the rapid development of the cryptocurrencies market and blockchain technology, a similar process of the initial placement of coins appeared. Likewise IPO, it was named ICO (Initial Coin Offering). The initial placement of coins is carried out using the IPO exchange rules for a more democratic cryptocurrencies market, and taking into account the peculiarities of this market. Conducting an ICO, they place not shares, but digital tokens. Further tokens are bought and sold on crypto-exchanges similarly to companies’ shares.
KEY DIFFERENCES OF ICO FROM IPO
IPO and ICO usually use similar fundraising ways. Nevertheless they have important differences and different purposes.
Differences For Investors / Participants:
- ICO: Conducted to issue cryptocurrency and create a product that will be bought for this currency. The rights of shareholders in this case are of secondary priority. For ICO participants, it is important to increase the investment.
- IPO: In the case of IPO, the conditions are different. And for IPO participants, corporate rights that ensure the received shares are important.
In Terms Of Regulations:
- ICO: Both financing instruments have different control and supervisory regulations. ICO is practically not regulated by states, it was even banned in some countries. The laws governing the ICO will most likely be adopted as such activities expand. In China, for example, the ICO was banned before the adoption of regulatory laws. The guaranty of its reliability is only the blockchain technology, which is currently developing.
- IPO: The situation with the IPO is quite the opposite. In most countries, laws that regulate IPOs have been adopted. Such legislation appeared as a result of numerous lawsuits against the organizers of IPOs.
Differences Of Project Initiators:
- ICO: The circle of subjects that can conduct ICO is very wide. It can be various companies, funds, individuals and societies. To participate in ICO investors only need to have cash. No special knowledge is required, since the ICO projects are usually based on trust.
- IPO: can only be carried out by companies registered in a certain order and licensed to issue shares. If a person invests in shares, then he should carefully study the public data on the issuer, assess the prospects for the project. Investing in an IPO is done by professionals with rich experience. Usually these are large venture capitalists, investment and pension funds.
TOKENS VS SHARES
- ICO: An investor receives tokens that have a certain functionality. Most often for tokens, you can get products or services provided by the issuer-company. For example, on Ethereum platform for your tokens you can buy smart contracts, and in Factom project you can buy some information storage space. With the increasing popularity of the service/product, the price of tokens grows and they can be gainfully sold on crypto-exchanges for liquid crypto-currencies or ordinary (fiat) currencies. Ethereum tokens have become a full-fledged cryptocurrency and are traded on the Forex market.
- IPO: Traditional investors receive a part of the company in the form of preferred shares. These shares give the right for dividends, the right to participate in management in the form of voting at meetings of shareholders and so on.
- ICO: The cost of tokens and shares equally depends on the demand for the product produced by the company, but in they are very different at once. Clients of services based on blockchain technology have the right to use the product in exchange for tokens,
- IPO: The owners of shares have the right to a part of the property of the company producing the product, and this is a big difference.
In Terms Of ROI:
- ICO: Companies conducting ICO usually provide quick liquidity tokens and products, and return on investment occurs within one to five years. This is the biggest difference from traditional methods of doing business.
- IPO: A company that enters the IPO has already reached a certain level of development, meets the requirements for reporting, accounting standards, the quality of the product being sold. Return of investment in such companies occurs for 7-10 years due to the receipt of dividends for shares.
- IPO: The shares will continue to generate revenue.
- ICO: Tokens may stop growing in price and even depreciate.
DIFFERENCE IN RISKS AND BENEFITS
- IPO: Buying shares of a company, an investor receives all potential benefits. A company’s profit provides permanent dividends. In case of bankruptcy of a company, the shareholder has the right to a part of its assets. The funds received as a result of the IPO can not be spent uncontrolled, which guarantees the safety of the deposit. In addition, each shareholder is formally eligible to participate in voting for the company’s management and to vote on other management issues.
- ICO: An investor who buys tokens earns income only after they are sold. There are, of course, credit tokens, but this is more like a bank interest. Since the investor buys the right to use the product in the future, he does not participate in project management and has no control over the distribution of funds. Everything is built only on trust to the organizers of the project.
Investing in any cryptocurrency is much more profitable than traditional investment. It is believed that the risks here are much higher too.
Although a traditional company can become unprofitable, go bankrupt or fail to fulfil its obligations as well.
Tokens and shares have their advantages and disadvantages, but both are investment tools that can make you a profit.