ICO is short for Initial Coin Offering. When launching a new cryptocurrency or crypto-token, the developers offer investors a limited number of units in exchange for other major crypto coins such as Bitcoin or Ethereum.
ICOs are amazing tools for quickly raining development funds to support new cryptocurrencies. The tokens offered during an ICO can be sold and traded on cryptocurrency exchanges, assuming there is sufficient demand for them.
The Ethereum ICO is one of the most notable successes and the popularity of Initial Coin Offerings is growing as we speak.
A brief history of ICOs
Ripple is likely the first cryptocurrency distributed via an ICO. At the start of 2013, Ripple Labs began to develop the Ripple payment system and generated approximately 100 billion XRP tokens. These were sold through an ICO to fund Ripple's platform development.
Mastercoin is another cryptocurrency that has sold a few million tokens for Bitcoin during an ICO, also in 2013. Mastercoin aimed to tokenize Bitcoin transactions and execute smart contracts by creating a new layer on top of the existing Bitcoin code.
Of course, there are other cryptocurrencies that have been successfully funded through ICOs. Back in 2016, Lisk gathered approximately $5 million during their Initial Coin Offering.
Nevertheless, Ethereum's ICO that took place in 2014 is probably the most prominent one so far. During their ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoin each, raising almost $20 million. With Ethereum harnessing the power of smart contracts, it paved the way for the next generation of Initial Coin Offerings.
Ethereum's ICO, a recipe for success
Ethereum's smart contracts system has implemented the ERC20 protocol standard that sets the core rules for creating other compliant tokens which can be transacted on Ethereum's blockchain. This allowed others to create their own tokens, compliant with the ERC20 standard that can be traded for ETH directly on Ethereum's network.
The DAO is a notable example of successfully using Ethereum's smart contracts. The investment company raised $100 million worth of ETH and the investors received in exchange DAO tokens allowing them to participate in the governance of the platform. Sadly, the DAO failed after it was hacked.
Ethereum's ICO and their ERC20 protocol have outlined the latest generation of crowdfunding blockchain-based projects via Initial Coin Offerings.
It also made it very easy to invest in other ERC20 tokens. You simply transfer ETH, paste the contract in your wallet and the new tokens will show up in your account so you can use them however you please.
Obviously, not all cryptocurrencies have ERC20 tokens living on Ethereum 's network but pretty much any new blockchain-based project can launch an Initial Coin Offering.
The legal state of ICOs
When it comes to the legality of ICOs, it's a bit of a jungle out there. In theory, tokens are sold as digital goods, not financial assets. Most jurisdictions haven't regulated ICOs yet so assuming the founders have a seasoned lawyer on their team, the whole process should be paperless.
Even so, some jurisdictions have become aware of ICOs and are already working on regulating them in a similar manner to sales of shares and securities.
Back in December 2017, the U.S. Securities And Exchange Commission (SEC) classified ICO tokens as securities. In other words, the SEC was preparing to halt ICOs they consider to be misleading investors.
There are some cases in which the token is just a utility token. This means the owner can simply use it to access a certain network or protocol in which case they may not be defined as a financial security. Nevertheless, equity tokens whose purpose is to appreciate in value are quite close to the concept of security. Truth be told, most token purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs are still lingering in a grey legal area and until a clearer set of regulations is imposed entrepreneurs will attempt to benefit from Initial Coin Offerings.
It's also worth mentioning that once regulations reach a final form, the cost and effort required to comply could make ICOs less attractive compared to conventional funding options.
For now, ICOs remain an amazing way to fund new crypto-related projects and there have been multiple successful ones with more to come.
However, keep in mind everyone is launching ICOs nowadays and many of these projects are scams or lack the solid foundation they need to thrive and make it worth the investment. For this reason, you should definitely do thorough research and investigate the team and background of whatever crypto project you might want to invest in. There are multiple websites out there that list ICOs, we recommend checking this ICO calendar if you're interested to invest in a crypto project.