An IPO or initial public offering opens a window for companies to generate funds through stock and share sales. The practice has been here for decades and is a standard method to fund business expansion and projects.
On the other hand, an initial coin offering, or ICO is a means of crowdfunding by public sale of a company’s created digital coins or tokens. The company doing an ICO creates and sells digital coins instead of stocks and their mission is the same: funding their business or the next project. We’ve previously covered why some start ups are looking at ICOs as a new means of funding.
While a lot of people (particularly in startup ecosystem) are excited about ICOs and see it as another way of going public, very few are aware of the key differences between the two.
Let’s look at the some of the main differences between an ICO and an IPO.
1 – Regulation vs Non-Regulation
The fundamental difference between the two is related to regulation. A company that is looking to issue an IPO has to create a legal document (prospect) in order to get registration and approval from the local regulatory authority. The regulators require that a company declares the reasons and intentions, maintain transparency, and provide vital information as well as protection to investors.
Conversely, ICOs are not regulated formally, and there’s no legal requirement to create and submit a certain legal draft. They just issue a whitepaper that contains project details, purpose and mechanics, but that too isn’t legal/compliance requirement. Due to the same reason, there’s no uniform standard or structure for whitepapers to follow.
2 – Utility & Ownership
When a person acquires stocks through an IPO, it grants him/her an ownership stake in the (future) earnings of the company. People holding stocks are entitled to receive dividends and cast votes at the shareholders meeting (though privileges vary from stock to stock).
Conversely, acquiring some tokens from an ICO doesn’t necessarily guarantee any ownership or stake in the business. Yes, there are certain ways that investors could get benefit from the coins in the future but this depends on the token structure. While some may offer a slight stake in the future revenue, there’s no standard promise (of dividends) across the board in ICOs.
**3 – Duration **
Another key difference between the two crowdfunding techniques is their time duration. An IPO is traditionally a lengthy process because it involves a great deal of work to be compliant with regulations and legally above board. Usually, a regulatory authority (like the Securities and Exchange Commission in the USA) takes between 3 and 6 months to process and approve an IPO request.
Conversely, the duration for holding an ICO is typically very short primarily because there’s no legal or regulatory compliance issue. Usually, the duration depends upon the nature of project and objective of the ICOs as the company needs only a Whitepaper (or something else describing what they do) and a smart contract to initiate the crowdsale. While most of the popular and hyped token-sales get over very quickly (usually by hitting their maximum), a few may last for a month or until a fixed date.
In addition to the listed three elements, ICOs and IPOs have different rules when it comes to access to offerings, track record, and few other things. However, the fundamental difference relates to regulations and compliances – and it contains everything. Lack of regulation is the key issue in cryptocurrency market, which governments and regulators are trying to tackle worldwide.
As an ICO consulting company, we advise you on how to protect yourself through intensive security diligence, market intelligence, and networking. We’ve covered a comprehensive guide on Forbes on how to manage and run a successful ICO before. You can read it here!