The fast developing world of blockchain technology has given birth to many new systems. We often hear the term ICO especially when a new cryptocurrency is about to come out. ICO sounds a bit like IPO but is it anything like it? Yes and no! When it comes to ICO vs IPO, the underlying purpose is similar, but there are many other significant differences.
Before we examine the difference between the two, let’s learn what each of these terms means.
What are ICO and IPO?
ICO stands for Initial Coin Offering, which is a process associated with cryptocurrency. It is how startup companies come to life through crowdfunding. They create and sell tokens as a way to raise funds for the development of the project. ICOs are directly linked with blockchain technology.
IPO or Initial Public Offering is an established process designed for established companies to go public. In order to become a publicly traded company and to be listed on a stock exchange, private companies go through IPO. This process has many formalities that the company must complete.
Simply put, IPO is basically selling shares of a company to the public to collect funds. Essentially, both the processes help the company raise funds for more development. However, there are many differences between the two.
Difference between ICO and IPO
Here are some of the basic differences in our detailed ICO vs IPO comparison.
Even though companies offer ICO or IPO for raising funds, their approach and backgrounds are different. The primary purpose of the ICO is to get money to develop the startup if the company is small and new.
IPO, on the other hand, is offered by a company at a later stage when it has matured. These are usually big enterprises that are looking to expand. They are, in a way, raising funds for expansion. Any company can offer IPO while many times only a part of the company is available in stocks.
For an IPO, there are certain requirements that the company must meet in order to be listed as a publicly traded company on any stock exchange. The conditions are concerning the revenues of the company in the past. These records have to come from a professional accounting firm.
In the case of an ICO, there is no requirement for a track record. There is no track record in the first place as the company offering ICO is just starting out. There is no regulatory framework for ICOs.
Another requirement for an IPO is a legal document prospectus. It is a legal document that lists all the important information about the company and the IPO. It has to be transparent and includes things such as the names of the firm’s principals, financial information, number of available shares, prices, etc. The company files it with the Securities and Exchange Commission (SEC) which then approves it before it goes to potential investors.
The only document ICOs offer is a white paper. This document contains everything about the project. However, for an ICO the white paper is not an obligation. It merely helps investors understand what they are investing into. Simply put, no authority needs to approve this document.
The IPO is a long process that can easily take up to six months. There are a number of legal procedures that the company needs to go through before their stock is available for sale.
ICOs don’t take that long. In fact, the time it takes for an ICO depends on the project itself. The crowdfunding is what takes the most time in an ICO which begins after the company publishes white paper and issues smart contracts. Therefore, most ICOs take up to a month.
There is a significant difference between the utility of the two processes. The stocks that you buy through an IPO represent ownership or stake in the company. The stocks can have different classes like common stocks, preferred stocks, and hybrid stocks. As a stakeholder, you become entitled to the future earnings of the company (dividends).
When you acquire coins through an ICO, it does not grant you any ownership of the project. However, you can benefit from the coins in many ways depending on the structure of the cryptocurrency. In general, the value of the coin depends on its adoption. That is the primary utility of an ICO.
The target market of IPO and ICO is very different too. IPOs are intended for big institutional investors, like banks. The process is focused more towards these buyers than retail investors. However, ICOs are for anyone. You essentially need a currency like Bitcoin that you can convert into the tokens for the ICO. In essence, the target market of an ICO is those involved in the cryptocurrency industry.
Summary: ICO vs IPO
The current market cap of cryptocurrency industry is well over $100 billion. In the first quarter of 2018, ICOs raised more money than they did in the entire previous year. It stood at $6.3 billion at the start of April 2018. This exponential growth in ICOs and the overall market cap of cryptocurrency has grabbed the attention of traders and finance experts.
The IPO market raised over $35.2 billion in the first six months of 2018 in the US. This was mainly due to technology companies like Dropbox, Spotify, and Xiaomi going public.
Here is a summary of ICO vs IPO:
|Regulatory authority that oversees the process||No regulatory oversight|
|Track record and credibility||No track record required|
|Lengthy process (6-9 months on average)||Short process (up to 1 month)|
|Exclusive availability||Open to everybody|
|Profit paid monthly as dividends||Earning based on adoption|
Many people who come across ICO for the first time compare it with IPOs, and they are not wrong to do so. With IPOs you are investing in companies that have years of experience and substantial financial standing whereas with ICOs you are investing in an idea. Also, both the processes are designed to help the company raise money for development or expansion. In order to better understand ICO or its alternatives, it is essential to comprehend IPO as it springs from this centuries-old process.