Dec 21, 2018 07:21 UTC
Dec 22, 2018 at 09:52 UTC
Major Differences Between ICOs and IPOs
If you have been around the crypto block for a while, you would know that ICOs are often considered to be the IPOs of cryptoverse.
However, if you’ve cleared your head about the myths about blockchain and cryptocurrencies we have busted earlier, you would know that the crypto market and stock market work quite differently from one another.
Likewise, ICOs and IPOs also have some major differences.
Before listing them out, let’s quickly define ICOs and IPOs.
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What Is An ICO?
An ICO or Initial Coin Offering is a crowdfunding tool, where the developers of a particular project, design a crypto-based coin or token to facilitate fundraising for taking the project forward. There are many pros and cons of investing in ICOs and whether you love them or hate them, it seems that they are here to stay in the world of crypto.
What is An IPO?
An IPO or Initial Public Offering is basically the stock market launch of a company. The company starts selling its stocks, usually underwritten by an investment bank, to institutional investors and sometimes also to retail investors. Stocks are bought by these investors to fund the company.
Major Differences Between ICOs and IPOs
The key differences between the two forms of crowdfunding are as follows:
1. Regulatory Control
The stringency of regulatory control is an area where ICOs and IPOs have some drastic differences.
While IPOs have to follow a strict set of criteria before they can finally take their stocks public, ICOs are not bound by any such compulsion or obligation.
Usually, an IPO must submit a detailed prospectus as a proposal to regulatory authorities. Only after that has been green-lighted and declared to be in keeping with all the rules, can they go ahead.
On the other hand, the lack of adequate regulatory framework for ICOs means that they can simply move ahead with a whitepaper that has no norms for standardisation.
Therefore, while we hear much less of IPO scams, fraudulent ICOs are a common occurrence in today’s world. The very fact that this year’s SEC Enforcement Report was dominated by the issue of ICO malpractice, exemplifies the possibilities of scam inherent in the situation.
2. Investor Access
Usually, anyone who is interested in participating in an ICO can do so and buy crypto tokens by shelling out a certain sum of money.
As for IPOs, however, when the company takes its shares public, it is usually just the established institutional investors who contribute to the fundraising. The general public and laymen usually buy small amounts of stocks from stock exchanges later on.
Thus, IPOs are restricted to some sort of an elite access, while ICOs are mostly open to all.
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3. Utility Derived By The Investor
In case of IPOs, buying of stocks means the investors become a direct stakeholder in the company. They get a proportionate stake of ownership in the company and can earn a share of its profits in the form of dividends. On the other hand, ICO investors are not guaranteed of such a return. Their returns depend on how high the adoption of the ICO token rises to. If its adoption is high, then its price will automatically increase and represent an investment potential. Besides, the high adoption would also make the likelihood of using it to facilitate intra-project transactions higher.
Thus, while IPOs offer a direct utility to the investor, ICO investors must wait for adoption to increase to be able to generate value.
4. Duration of An Offering
ICOs usually last around a month, depending on whether it had a maximum supply cap to meet or a pre-set time limit to adhere to.
Besides, since it need not spend a lot of time on getting regulatory approvals, it does not prove to be too lengthy an affair.
On the other hand, IPOs, with their legal compliance procedures and long offerings, run for nearly 6 months on an average.
Thus, IPOs stay longer in the market, while ICOs, especially ones that manage to generate quite a hype in the market, tend to get over rather soon.
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