While the Initial Coin Offerings (ICOs) in crypto seem similar to the traditional Initial Public Offerings (IPOs), they are definitely not the same. The main difference between ICOs and IPOs is the former offers digital assets to the investors, the latter gives a part of the equity of an established company.
The final objective of both ICOs and IPOs is the same – raising funds to support the respective projects, companies, or platforms. But, they differ in many ways including the assets they sell, ownership, use cases, types of investors, etc. Differentiating ICO vs IPO can be difficult and confusing to the unversed. That is exactly what CoinGape helps you with, in the present article.
Brief History of ICO vs IPO
The first-ever ICO was issued in 2013, by the Mastercoin project, which allowed users to manage their digital assets on Bitcoin blockchain. Later, Ethereum held its ICO in 2014 to raise funds for supporting the development of the project.
The launch of Ethereum blockchain opened gates for many crypto projects to emerge on its network. After ICOs gained popularity, more than $6 billion worth of funds were raised from crypto ICOs by Q1 2018. Filecoin ICO is the largest crypto ICO till date, raising $257 million worth of funds in 2017.
IPOs were ancient methods of crowdfunding by already established and successful companies. The Dutch East India Company conducted the first IPO in 1602, remaining as the historical event in the traditional financial industry. In the United States, Bank of North America held the first IPO in 1783.
The IPO concept went mainstream and became a common way for companies to raise capital in the 19th century. More than 6,000 companies held IPOs from 2000 to 2023, as per IPO Statistics by Stock Analysis. Alibaba Group’s $25 billion IPO, which happened in 2014, is the largest IPO till date.
ICO vs IPO Strategy Differences
Stage
When a crypto project is in the budding stages, it requires funds to develop the infrastructure. So, crypto ICOs are held even before the project is officially launched, to raise funds. The capital raised, in exchange for the digital assets offered in an ICO, is used for the project development.
In the case of IPOs, already established, successful, and privately owned companies looking to expand further conduct them. These companies already have a proven track record and are financially stable. They raise capital through IPOs by offering a part of the ownership to investors. And, utilize that capital for the company’s future development and expansion.
Regulation
Since the concept of ICOs came to light with the advent of crypto projects, it is new and in its nascent stages. They are self-regulated events and are often verified by the platforms which are going to conduct the ICOs. These platforms can be crypto launchpads, centralized crypto exchanges, decentralized crypto exchanges, and others.
IPOs are regulated and governed by several national and international organizations. For instance, the United Nations Securities and Exchange Commission regulates IPOs in the US and the UK Listing Authority regulates them in the UK, etc.
Utility
ICOs raise funds from investors and offer them digital assets such as cryptocurrency coins, tokens, or tokenized securities. They allow investors to access the project’s future products, services, and allow them to take part in the governance. Besides, investors get crypto tokens at a much lesser price in ICOs, allowing them to gain profits when the project becomes successful.
After investing in IPOs, investors get equity or a share of the company. This implies, the ownership of the founder dilutes and each IPO investor owns a share of the company. Apart from the ownership, investors get voting rights and eligibility to claim dividends.
Listing Requirements
When it comes to ICOs, there are no listing requirements. Startup crypto projects can list their ICOs on crypto launchpads and exchange platforms. All that is required to hold the ICO is a minimum viable product, whitepaper, and audited open-source code. However, some crypto projects hold ICOs even without these factors.
However, there are stringent rules and requirements to list companies for IPOs. Unlike ICOs, IPOs are listed on stock exchanges and they must fulfill some prerequisites. They must be established companies and meet financial standards such as cash flow, capitalization review, earnings, and others.
Beneficiaries
Beneficiaries of ICO events are both investors and the team behind the project. While investors get crypto assets in exchange for their investment, the project’s team gets the required capital to develop products and services.
On the other hand, beneficiaries of IPOs are the company, investors, and the underwriters. The company gets funds for future developments and inventors get the ownership of the company. The underwriters, who act as middlemen and help list the IPO of the company, receive fees for their services.
Investor Type
ICOs are open to all types of investors. All they need is a crypto wallet, minimum required funds, and an internet connected device to participate in an ICO. Some ICOs do not even consider KYC and identity verification of investors. In IPOs, only accredited investors with a previous investment experience with a considerable income or net worth can participate. Additionally, investors must fulfill KYC requirements as IPOs are regulated by governments.
Price Impacts
The price of ICO is usually much lower than IPOs as they are in the starting stages. And, the prices of crypto assets in ICOs are more volatile and can fluctuate wildly. Moreover, the overall market capitalization of ICOs is also lower than IPOs. Since the already established companies go for IPOs, they usually have higher market capitalizations.
Companies determine the price of each share in an IPO after careful consideration and analysis. After research and analysis with third parties, companies finalize the number of shares and price of each share in an IPO. In the case of ICOs, projects set the price of crypto assets based on token economics and their capital requirements.
Conclusion
ICOs vs IPOs is an important area to pay attention to before making an investment decision. Whether a project goes for an ICO or IPO depends on the type of the project, assets sold, purpose of the fundraising, and other factors. Even though the final outcome is to raise capital, there are many differences between ICOs and IPOs. Whether you consider ICOs or IPOs to invest in, it is extremely crucial to do your own research and weigh in pros and cons!
Frequently Asked Questions (FAQs)
Yes, an IPO is legal as the companies must fulfill predefined criteria to list their IPOs. They also adhere to the rules and regulations of government organizations such as the US SEC.
Whether an ICO or IPO is profitable or not depends on the project behind them. If the company or the project has good fundamentals with future growth potential, then investing in its ICO or IPO will be profitable in the long run.
We cannot say that ICOs are better than IPOs because each carries its own risks and challenges. However, when compared, ICOs are more riskier than IPOs.
IPOs or Initial Public Offerings are held when an already established company goes public and offers shares to investors. STO or Security Token Offerings issue digital tokens that are backed by tangible assets such as real estate or stocks. ICOs or Initial Coin Offerings are held by crypto projects and offer digital assets in exchange of raising funds from investors.
Filecoin ICO is the largest so far in the crypto industry. It significantly raised $257 million from its ICO in 2017.
