ICO Vs IPO
With the advances in technology, businesses have been enabled to raise capital faster, in larger amounts, and from a larger radius of investors than was ever before possible. Two of the most popular methods for raising capital on the market today are the Initial Coin Offering (ICO) and the Initial Public Offering (IPO). Despite the similarities in their acronyms, the two are distinct in their respective function and have several key differences between them.
What Is An Initial Coin Offering (ICO)?
An ICO is a method of fundraising that utilizes cryptocurrencies. It entails an entity, usually a startup company, issuing digital tokens to investor in exchange for money which is then held as working capital. A key factor that makes ICOs different from IPOS is that they are unregulated and have no minimum capital requirements.
ICO is considered a game changer when it comes to fundraising as it often doesn’t require any venture capital (VC) funding. Furthermore, it can be used to finance Seed and even pre-IPO stages of development.
What Is An Initial Public Offering (IPO)?
An IPO is a method of crowdfunding similar to an ICO, but it utilizes securities instead of cryptocurrencies or digital tokens. An organization that wishes to issue an IPO must obtain registering with the relevant authorities and, obtain approval from a stock exchange. These organizations must also be compliant with a range of government regulations such as those related to FINRA, the SEC, and anti-money laundering among others.
IPOs are primarily used for Pre-IPO funding, although it can also be used for Seed Investments and other ventures.
ICO Vs IPO: Key Differences
Having seen what an ICO and IPO involve, let’s look at the key differences :
Legal and Regulatory Requirements
The major difference between ICOs and IPOs is regarding compliance with laws and regulations. ICOs have no minimum capital requirements and are completely unregulated by government authorities, whereas IPOs are closely monitored by various regulatory bodies.
Investor Profile
IPOs require investors to be accredited by a stock exchange, meaning they need to meet certain thresholds – including income and net worth – to be accepted as an investor. On the other hand, the majority of ICOs are open to any individual, regardless of their financial background.
Digital Tokens or Securities
ICO investors obtain digital tokens from either the platform or issuing company, whereas IPO investors purchase securities as a form of equity in the company, usually in the form of stocks or shares.
Marketing
ICOs rely heavily on online marketing activities such as social media and review sites, as well as digital marketing channels such as content marketing and email campaigns. IPOs, on the other hand, are often marketed through stockbrokers and financial advisors via print or portfolio marketing.
Fees
IPOs involve a multitude of fees, including those associated with listing on exchanges, legal and accounting services, filing and registration fees, as well as auditing and consulting fees. In contrast, ICOs involve fewer fees as they are unregulated, and in most cases, there is no need to hire professional advisers or to list on a stock exchange.
Liquidity
There is a clear difference between ICO and IPO regarding liquidity. Tokens issued through ICOs are not universally accepted like stocks, meaning that they are more illiquid than shares issued through IPOs.
Fundraising Goal
The ultimate goal of both ICOs and IPOs is to raise capital for the issuing company. ICOs, however, need less capital for successful completion as digital tokens needed to be converted to fiat currency can cost significantly less than the amount raised from an IPO.
Funds Raise
IPOs involve larger capital requirements than ICOs, as the funds raised from an token sale are almost always smaller than those raised from an IPO.
It’s clear from the discussion above that there are significant differences between an ICO and an IPO. While both methods are used for companies to raise capital, there are some key differences including legal and regulatory requirements, investor profile, digital tokens/securities, marketing, fees, liquidity, fundraising goal, and amount of capital raised, that make ICOs and IPOs distinct.
When deciding which method of crowdfunding is best suited to your project, be sure to consider all of the key differences highlighted above to decide which method offers the most benefits.
