Everyone who is familiar with stock trading and investments in companies’ shares is aware of the concept of public offering of shares. According to the English name of this phenomenon Initial Public Offering appeared to all known term IPO. During the IPO process, a previously closed company becomes public and sells its shares to everyone. Thus, it receives funds for business development, and investors become co-owners of the company and receive their share of the profits. IPOs are usually conducted by companies that have a successful business and are widely known.Due to the rapid development of the cryptocurrency market (see cryptocurrency charts) and blockchain technology, a similar process of initial placement of digital currency coins has emerged. Similar to the IPO, it was named ICO (Initial Coin Offering). The initial placement of coins is carried out with the application of IPO rules for a more democratic market of cryptocurrencies, taking into account the peculiarities of this market. When an ICO is held, not shares are placed, but digital signs – tokens. Later on, tokens are bought and sold on cryptobearches by analogy with the companies’ shares. (Read about ICO in the article “What does ICO mean and how do I make a profit from it?)
Key differences between ICO and IPO
The two fundraising methods are used for similar purposes, but have important differences and different purposes. ICO is conducted to issue cryptographic currency and create a product that will be bought for this currency. Shareholder rights are of secondary importance here. In the case of an IPO, the conditions are different, and the first place is given to ownership. Participants also have different goals. It is important for ICO members to increase their investment, and for IPO members it is important to have corporate rights that provide the shares they receive.Both financing instruments have different control and supervision regulations. ICO is virtually unregulated by states, even banned in some countries. Its reliability is guaranteed only by the blockchain technology, which is still under development. The IPO situation is quite the opposite. Most countries have adopted laws governing IPOs. Such legislation emerged as a result of numerous lawsuits against the organizers of the initial public offering. Laws governing ICO are likely to be enacted as such activities expand. In China, for example, ICO was banned before regulatory laws were passed. (Find out what blockchain technology is in the article “What is Blockchain and why do you need it?”)The circle of subjects that can conduct an ICO is very wide. These can be different companies, foundations, individuals and societies. The IPO may only be conducted by companies registered in a certain manner and licensed to issue shares. To participate in ICO, investors only need to have money. No special knowledge is required, as ICO projects are usually based on trust. If a person invests in shares, he or she should carefully study public data about the issuer and evaluate the prospects of the project. IPO investments are made by professionals with extensive experience. These are usually large venture capitalists, investment funds and pension funds.
Difference of tokens from shares
Traditional investors receive part of the company in the form of preferred shares. These shares give the right to profit (dividends), the right to participate in management in the form of voting at shareholders’ meetings, etc. In ICO, the investor receives tokens that have certain functionality. Most often, tokens can be used to obtain products or services provided by the issuer. For example, on the Efiryum platform, smart contracts can be purchased for tokens, and in the Factom project, space for information storage can be purchased for tokens. With the growing popularity of the service, the price of tokens grows and they can be sold at a profit on cryptobirzhas for liquid cryptocurrencies or ordinary (fiat) currencies. The tokens of the Efirium project have become full-fledged cryptocurrency and are traded at the Forex market. (Read about cryptocurrency trading in the article “How easy is it to trade cryptocurrencies at Forex market?)The price of tokens and shares equally depends on the demand for the product produced by the company, but in another they differ greatly. Customers of blockchain-based services are entitled to use the product in exchange for tokens, while equity holders are entitled to part of the ownership of the company producing the product, which is a big difference.ICOs typically provide a quick way to achieve liquidity for tokens and products, and a return on investment takes place within one to five years. This is the biggest difference from traditional methods of doing business. The company, which is going to IPO, has already reached a certain level of development, meets the requirements for reporting, accounting standards, quality of the product. The return on investment in such companies takes place within 7-10 years through the receipt of dividends on shares. But stocks will continue to be profitable, and tokens may stop growing in value and even depreciate.
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Difference in risks and benefits
By buying the company’s shares, the investor receives all potential benefits. The company’s profit ensures constant dividends. In the event of bankruptcy of the company, the shareholder has the right to a portion of its assets. Funds received as a result of the IPO cannot be spent uncontrollably, which guarantees the safety of the deposit. In addition, each shareholder has the formal right to participate in the election of the company’s management and to vote on other management issues.An investor who buys tokens receives income only after selling them. There are, of course, credit tokens, but it’s more like bank interest. As the investor buys the right to use the product in the future, it does not participate in the management of the project and does not have control over the expenditure of funds. Everything is built only on trust of the project organizers.Investments in cryptocurrency are much more profitable than traditional investments. It is believed that the risks here are much higher. Although an ordinary company may become unprofitable, bankrupt or default on its obligations. Tokens and stocks have their advantages and disadvantages, but both are investment instruments that can be profitable.Brokers who have Bitcoin trading available
Finally, watch the video on the similarities and differences between ICO and IPO.