An Initial Coin Offering (ICO) is a fundraising method used by new projects to sell their essential crypto tokens in exchange for Ether or Bitcoin. This undertaking bears similarity to Initial Public Offerings (IPOs) whereby investors buy shares of companies that have been publicly-listed. Many people still ask what is an ICO because this is still a relatively new concept beyond the blockchain community.
ICOs are modeled on traditional venture-funding models that corporations typically use. Even so,skeptics still consider ICO projects as unrestricted securities, which allow founders to raise unjustified amounts of capital.
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How Do ICOs Work?
To fully explain what is an ICO, you must first understand how ICOs operate. Since ICOs are fundraising tools, you need to create a digital token or cryptocurrency that you will sell to investors. One of the platforms that you can use to create digital coins is Ethereum.
After you have a digital token or cryptocurrency, you should offer them to retail investors who will pay for it using other cryptocurrencies such as Ether and Bitcoin. Unlike the case with IPOs, investors don’t get an equity stake in a company. Instead,the idea behind ICOs is that the coin can be used on whatever products that will be created.
During an ICO, it is hoped that the value of the digital token being offered to investors will appreciate so that it can eventually be traded for a profit. Before an ICO, the holder of digital tokens that are to be sold needs to create a white paper detailing how the idea could be useful. After that, he/she should ask potential investors to send money in the form of Ether or Bitcoin so that in return, they are sent some of the digital tokens. If the digital token that is being offered ends up being used a lot and in high circulation, its value appreciates.
Legal Aspects of ICOs
Many people wonder whether ICOs are legal due to the misconception that this fundraising method is only aimed at enriching a few individuals at the expense of investors. ICOs area legitimate way of fundraising. The few gray areas in existence result from the fact that ICOs are a way of distributing unregulated and new financial assets.
The Securities and Exchange Commission recently made a decision on the status of tokens that are issued during ICOs. Investors ought to consider whether or not tokens that are offered to them during an ICO pass the Howey test. Similarly, they must evaluate the funding models of ICOs before they invest in digital tokens. Since ICOs are primarily unregulated, investors need to carefully examine the whitepaper as well as research team members before investing.
Investing in digital tokens during an ICO is a speculative and risky affair but has awesome rewards.Therefore, you should work with a professional or individuals who have been involved in similar transactions in the past. This way, you will be able to invest in an ICO that guarantees a return on investment. Click here for accurate ICO reviews today.