ICO and IPO have become very common terms in recent times. But there are many who are confused while comparing ICO vs. IPO. It is because of the fact they are not clear about the differences between the two, thereby giving rise to confusion. First, let us understand the terms individually and then the key differences between the two to eliminate all confusion.
What is an ICO?
ICO or initial coin offering, also referred to as initial currency offering is a special type of funding that uses cryptocurrencies. ICO is an unregulated means of raising funds for a new cryptocurrency venture. It is very often a form of crowdfunding in the cryptocurrency and blockchain environment.
What is an IPO?
IPO or initial public offering refers to a public offering where shares of any company are sold to institutional investors and retail investors. Usually, an IPO is underwritten by one or more investment banks and the banks also arrange for the shares that are to be listed on the stock exchanges.
Differentiating ICO vs. IPO
At the time of drawing out a comparison of ICO vs. IPO, both of them share a similar goal for a company which is nothing but the initial raising of funds. While the idea behind them is the same, but there is a difference in the modes that are used for securing funds. ICO or initial coin offering makes use of tokens or cryptocurrencies for raising funds and on the other hand, IPO or initial public offering puts the stocks of the company for sale. The mode used in ICO and IPO is a major difference between the two. In addition to this, there are a number of other points like regulation, ownership differences, listing requirements, etc. on which ICO and IPO differ. Let us now understand the key differences between them.
1. Stage of Occurrence
Initial coin offering occurs at a very stage in the company usually before it has any kind of working services or products and is in need of working capital for the purpose of bringing their ideas to life. On the other hand, initial public offering happens at a later stage in the development of a company where there are already existing products or services generating revenue. But the company requires capital or funds for long-term development instead of working capital. Therefore, the ICOs happen to be riskier as compared to the IPOs and hence demand a greater return on investment.
2. Requirements for Listing
Initial coin offerings can be started without their underlying token being available on exchanges. It means that the investors can invest in an ICO, get tokens, and if the tokens are never listed on any exchange, the investors would never be able to sell their tokens. But the IPOs on the other hand should already have their shares listed on any exchange. This, in turn, make sure that there is appropriate cooperation between, thereby giving the investors peace of mind.
Regulation is another major point of difference while comparing ICO vs. IPO. The initial coin offering happens to be largely self-regulated in nature via the smart contracts on the network of blockchain. As opposed to this, an initial public offering is highly regulated by different regulatory agencies of the government. This, in turn, makes sure that the IPOs are safer to invest in as compared to the ICOs. But that does not mean being regulated is completely safe for the investors since there have been incidents of scams with the IPOs in the past. Each of the investors should proceed with a lot of caution and go through the terms and conditions in detail at the time of investing in either IPOs or ICOs.
4. Middlemen or Beneficiaries
Initial coin offerings have much more operational efficiency as compared to the initial public offering by eliminating the requirement for middlemen or intermediaries such as brokerages, exchanges, regulators, and a number of others. It is precisely the reason as to why initial coin offering can be much more profitable from the point of view of the investors. On the other hand, the initial public offering involves payout to the brokers and a number of other fees as well as percentages to the middlemen present in the process.
5. Type of Investors
If an investor wishes to participate in an initial public offering, they are required to necessarily meet all the strict requirements as outlined by brokers as well as the regulators. These regulations include being totally compliant with anti-money laundering rules and know your customer or KYC. But in the case of initial coin offering, none of the investors need to fulfill any kind of regulatory or compliance requirements. Anyone having access to the internet is able to participate in the ICOs.
6. Allocation of Investments
At the time of comparing ICO vs. IPO, there is a point of difference between allocation of investments in each of them. It is one of the areas where an initial public offering has proved to be better as compared to an initial coin offering. For example, there are some ICOs that have an unfair distribution of their investments that are crypto tokens. It is because of the fact that the “whales” tend to buy most of the tokens which then disfigures the price and makes room for manipulation of the market. But in the case of the IPOs, the shares are allocated through different feasible methods that are approved by the regulators, thereby assuring each of the investors of a completely fair distribution of shares of investments.
What has the Future in Store for ICOs?
In recent times, the process by which different companies raise funds via the investors has undoubtedly come a long way such as initial coin offerings and crowdfunding campaigns. We all know that the raising of funds through initial public offerings could be outdated in the near future. It is because when we compare ICO vs. IPO, ICOs tend to offer a wide array of benefits as compared to the IPOs like their high efficiency, vast outreach, high interest, and decentralization. Although there are a few negative aspects of the initial coin offerings which the initial public offerings do not have, ICOs will still win over with the advent of regulation and growth in the industry. Therefore, it would be quite right to say that the future of initial coin offerings looks bright.