ICOs vs. IPOs vs. Crowdfunding
ICOs, like IPOs and Crowdfunding, offer the “general” public something in return for their investments. At first glance these three institutions might resemble one another, but they are fundamently different. This article sets out to clear the misconceptions one might have received regarding these fundraising mechanisms.
ICOs vs. IPOs
A back to back comparison between ICOs and traditional IPOs helps singling out what sets both apart and what has consequently made token presales such an attractive investment vehicle for entrepreneurs. It turns out that the main reason why start-ups increasingly opt to raise funds the blockchain-kind-of-way is twofold, to save money and time.
Whereas the issuance of an IPO is submitted to a prescribed path and mandatory requirements, ICOs are not yet bound by any rules. This means that issuers of ICOs do not have to comply with any transparency rules (i.e. obligation to draft a prospectus), nor do they have to fulfil any of the other requirements attached to an IPO. As a result, ICOs can skip time consuming steps such as the financial audit or the preparation of the registration statement, which can take up to 9 months.
Furthermore, an ICO launch is usually more affordable as IPOs are notoriously rigid and expensive. A 2012 PWC Report[i] found that “on average companies incur underwriter fees equal to 5%-7% of gross proceeds, plus an additional $3.7 million of costs directly attributable to their IPO”. And finally, no investor protection rules mean that the potential pool of investors is not limited to accredited investors only.
And, even though it might seem logical to assimilate ICOs to IPOs, because each event represents the first time that a given share or token is made available to the public, such a comparison is flawed, because the rights conferred by the acquisition of shares and tokens can vary. Whereas a share distributed during an IPO represents an ownership stake in a company, a token will allow investors to have a claim to the usage of that token but will not necessarily have equity in the underlying corporate entity. However, it is important to note, that there are in fact some tokens, which do confer share-like rights to its investors, commonly referred to as equity-tokens, and as such blur the lines between ICOs and IPOs.
ICOs vs. Crowdfunding
ICOs and crowdfunding resemble one another in many ways. Both rely on the public to fund a project in its initial stage and contributors are early adopters, which usually get early access to whatever product is set to be launched. But, as with IPOs, it would be incorrect to call ICOs and crowdfunding one and the same thing.
First of all, ICOs are more accessible than traditional crowdfunding campaigns, which tend to be restricted to certain regions or countries. Also, traditional crowdfunding relies on platforms such as Kickstarter.com and IndieGoGo.com, while ICOs aren’t bound to any specific platform. Furthermore, products launched during ICOs are mostly blockchain based ideas, whereas crowd funded products can range from topics as different as textile and food.
The intention of the contributors also sets both capital raising mechanisms apart. While people who join a crowdfunding campaign are generally not motivated by any significant reward, ICOs often attract people seeking an investment opportunity.
Finally, the amount of money raised differs significantly between the two. Kickstarter.com, probably the most well-known crowdfunding platform to date, has managed to launch 140’000 projects and raise over $3.5 billion since its inception in 2009. While 600 ICOs have managed to attract over $12 billion in investments since 2014[ii].
So, although the two seem to have a similar nature at first sight, they differ in many key aspects, and as such need to be treated differently.