We have a couple of rules at SmallBusiness.com. (1) Our users should never make business or financial decisions based solely on what they read here, or anywhere, without first discussing it with their trusted financial advisor. (2) Be wary of things you don’t understand, like, say, Bitcoin, even when people seem to be making lots of money doing whatever it does. Those caveats aside, we keep getting questions like the ones that are the topics of this article; questions about Bitcoin and Blockchain. If you don’t know what those are, see #2. Fortunate for us, Steve King, a partner at Emergent Research and a regular contributor to SmallBusiness.com, was willing to tackle these questions.: What is an initial coin offering? Are they good ways to raise money? Steve’s overview is below, but a good place to start your journey of understanding an “ICO” is the article, “What the Hell is an Initial Coin Offering” on the MIT Technology Journal website.
See previous coverage of Bitcoin and Blockchain on SmallBusiness.com
What is an initial coin offering?
An initial coin offering is a new way of raising money. The company raising the money issues virtual coins or tokens and selling them to the public. A coin or token sale can be much like an initial public stock offering (IPO). (Note: However, and this is important to understand, ICOs are not currently regulated like IPOs.)
ICOs can also be like a crowdfunding campaign in that in many cases the coins can be used to purchase a product or service from the issuing company.
Startups have raised about $2.2 billion through ICOs so far this year, according to Coinschedule.com.
Unlike a stock IPO, where companies sell shares, an ICO lets investors buy digital “coins” used on cryptocurrency platforms. Companies built using blockchain, a digital database for recording financial transactions, raise money by selling these tokens, which can be used to pay for goods and services on their platform or can be stashed away as an investment. (CNBC.com)
What do ICOs have to do with Bitcoin?
ICOs use the technology behind the digital currency Bitcoin to create the coins and verify transactions. This is the main reason most companies issuing ICOs are somehow related to Bitcoin, Blockchain or related cryptocurrency technologies.
Why are ICOs getting so much attention?
With all the hype around Bitcoin, blockchain and other cryptocurrencies, demand has been extremely high for some of the ICOs.
What about fraud? Isn’t that a problem?
- The SEC has charged two companies with ICO fraud
- South Korea has banned ICOs
- China has put additional regulatory pressure on digital currencies in general
The U.S. hasn’t banned ICOs, but the SEC issued an investor alert in July warning investors to be wary of offers and claims of high returns.
Should a startup use an ICO to raise money?
Emergent Research believes ICOs are premature except, perhaps, for tech companies with involvement with digital currencies or Blockchain. While we haven’t yet heard of a company being defrauded in an ICO, it will happen at some point and that company will likely be naive about the technology involved.