ICO vs IPO: The “Big Bang” differences explained

WHAT’S THE DIFFERENCE?

Both ICO and IPO encourage investors to invest in growing companies, for sure. But the chief difference between ICO vs. IPO is an investor receives in exchange. And it’s a big difference.

INITIAL PUBLIC OFFERINGS (IPO)

In an IPO, a company works with an underwriter to sell ownership units of its company known commonly as stock to investors and the public to purchase and sell on regulated exchanges. We’re talking about the NYSE, NASDAQ, etc.

Although companies can offer different classes of stock, owning stock usually entails ownership rights in the company, along with perks such as shareholder voting and eligibility for dividends. Stocks and stock trading are also regulated by the Securities and Exchange Commission (SEC).

INITIAL COIN OFFERINGS (ICO)

Investors participating in ICO, however, don’t receive any kind of ownership stake or rights in the company conducting the ICO. Instead, ICO investors exchange run-of-the-mill fiat currencies such as dollars and euros, more commonly, established cryptocurrencies such as Ether and Bitcoin in exchange for bulk amounts of the company’s own newly established cryptocurrency.

The ICO company therefore receives the cash influx it needs to fund its activities, while the investor walks away with bulk amounts of the company’s own cryptocurrency tokens. The hope for investors here is that the coins they receive later appreciate in value much like Bitcoin and Ether did in dramatic fashion last year. Although this strategy is risky, investors could reap major rewards if the value of their tokens skyrockets.  

REGULATION DIFFERENCES BETWEEN ICO vs IPO

ICO has grown into a popular investment vehicle for fintech and cryptocurrency companies particularly because unlike IPO, ICO are unregulated. The format can allow startups to raise equity directly from individual investors without dealing with the cumbersome securities regulations tied to IPO. 

Governments are only just starting to consider cryptocurrency regulations, which could make launching ICO risky from a legal standpoint. The SEC (USA) has already warned that some ICO may need to be registered with and regulated as securities if they fall under the federal legal definition for securities, which goes beyond traditional stocks. 

KEY DIFFERENCES BETWEEN IPO VS ICO

  • ICO’s are short in duration, while IPO’s last much longer. 
  • IPO’s are exclusive, ICO’s are open to anyone. 
  • IPO’s aim to collect dividends, while ICO’s promote adoption of the company and its associated services/platform. 
  • ICO’s have a sordid history, and IPO’s have been used in business for years. 

Unlike an IPO, owning ICO tokens does not mean you have ownership of the project or its company, but it does give the ICO owners governing rights on the platform as well as access to that token’s utility. There are a number of ways in which investors of an ICO coin can reap future benefits. This depends entirely on the coin’s design and utility in combination with the goals of the project and whether they are ever met. 

A coin’s value often correlates directly with its perceived utility. Some coins generate their value by conferring a stake in the future revenue of the projects, while others equate its value to usage within the ecosystem developed by the organization it represents; i.e. the more adoption and use of the coin, the higher its value will rise. 

In the end, ICO’s are very similar to IPO’s except for the utility and digital currency that is sold. This factor makes ICO’s much more versatile than a traditional stock offering, and we have only seen the beginning of what an ICO and its underlying token is capable of. 

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