Advanced: What are ICOs?

A couple of years ago, initial coin offerings, or ICOs, made some major waves in the startup world.

This new kind of fundraising allowed ambitious companies to raise the money necessary to build their projects without influence from traditional lenders or venture capitalists.

The process as organic as can be, with startups calling on the general public to help raise millions of dollars from scratch much like the platform GoFundMe.

The biggest difference, however, was that these companies were creating their own cryptocurrencies to sell directly to the public instead of hawking their ideas on a third-party platform.

Though it is somewhat similar to an initial public offering, or IPO, there were no regulatory bodies involved, at least in the beginning.

ICOs allowed startups to launch their projects and build an avid group of believers in a completely new way. Millions were raised practically overnight, and in some cases, mere seconds, and some of the buyers of these coins even saw incredible returns on their initial investments.

While there are a number of positive stories, there are far more crash-and-burn scenarios that left companies broke and purchasers left holding the bag.

But before we get into that, let’s talk about where the idea comes from and how it works.

In the beginning, there was Ethereum.

Ethereum was the first project to launch under this new method of fundraising.

The founders, led by Vitalik Buterin, set up Ethereum as a non-profit based in Switzerland, hired a handful of lawyers, and launched the crowdsale on July 22, 2013, raising approximately $18 million in Bitcoin during the 42-day funding round.

By today’s numbers, purchasers spent around $0.30 per ether, so you can see why it would have been a good idea to invest in that particular ICO, as ether now holds steadily above $100 per token.

At the time, the sale was recorded on traditional documents to ensure every participant received their allotment of tokens, but the launch of the Ethereum platform really paved the way for the modern ICO.

You see, while Ethereum was the first ICO, it was certainly not the most advanced…and that’s because the Ethereum platform didn’t yet exist.

When Ethereum actually launched, it created a whole new way for startups to crowdfund their projects,

Thanks to smart contracts and the ERC-20 token standard, absolutely anyone could jump on the bandwagon.

With the Ethereum platform, developers could create entire blockchain projects from start to finish and fund those projects. It was a revelation in technology, sparking many a copycat in the years following.

But some projects took advantage of the easy money….

Essentially, all you needed to raise millions was a snippet of code, a whitepaper and a good marketing team…which was both a blessing and a curse to the burgeoning crypto space.

The Unraveling of the ICO Era

Over time, there were a number of successful ICOs built thanks to the Ethereum platform.

Brave, for example, the privacy-focused web browser founded by Brenden Eich of Mozilla, raised $35 in just 30 seconds. EOS, too, raised a shocking $4 billion in its year-long ICO.

But not everything was blue skies and sunshine in the crypto space…

The now-infamous DAO scandal was the first to highlight some of the issues with the too-big-too-fast ICO boom.

The project, a decentralized autonomous organization for venture capital funding, fell victim to a hack in 2016 after raising over $150 million worth of ether in its crowdsale, resulting in approximately $70 million being stolen.

The sheer volume of ether stolen, and its value, brought regulatory attention to the space in a big way.

While the Ethereum Foundation raced to get investors their money back through a series of controversial decisions which ultimately led to a hard fork in the Ethereum blockchain, the SEC also made its first ruling in the space, stating that the DAO was a security offering, and that the project itself and its investors were subject to securities laws.

After that, a number of other projects caught the attention of the SEC, many of which were far less innocent than the DAO.

From defrauding investors to blatant exit scams, the space grew more controversial over time, requiring regulatory officials to step in on several occasions.

Though the SEC still does not have clearly defined rules on the subject, the general attitude towards ICOs is evolving.

What’s Next for ICOs?

With increased attention on the ICO space, many newer projects are going above and beyond to remain compliant with SEC suggestions.

The Telegram crowdsale may very well be looked at as a turning point in the space. The messenger app raised over $1.7 billion through private sales to accredited investors, a move which signaled the general shift in attitude towards the previously-laxed regulatory protocols.

Now, the hot subject in fundraising are STOs or security token offerings.

Like ICOs, STOs are built on smart contracts and typically feature blockchain-based startups looking to raise funds.

Where ICOs offering investors little more than a coin, which may or may not grow in value, be used within an ecosystem or as a flat-out currency, STOs are much more refined.

STOs are created as securities, meaning investors are paying for equity, debt, revenue share, etc. This standard also limits the sale to accredited investors, a group of investors which the SEC has deemed capable to take on the risk associated with such public sales.

The slippery regulatory slope from which STOs were born has also taken its toll on markets, with many projects not receiving the attention they would have two years ago.

While the shift in focus may be off-putting to some crypto pioneers, however, it is a sign that the space is maturing.

And though the insta-cash ICO hayday may be over, something new is already being built, and the ICO 2.0 is already lurking on the horizon.