In recent years, the Initial Coin Offering, or ICO, has emerged as an innovative and dynamic mode of funding for startups around the world. This process allows companies to raise funds by issuing digital assets, called tokens, which are often based on blockchain technology. While this model presents interesting opportunities, it also comes with significant risks, prompting a deep understanding of the mechanisms and implications of this funding method.
Presentation and functioning of ICOs
An ICO, acronym for “Initial Coin Offering,” constitutes a funding mode through the issuance of digital assets which, through tokens, allows companies to solicit capital. This device can be applied in various sectors such as health, technology, or the environment, provided that the use of blockchain is integrated. Token issuers can be new startups or already established companies, whether listed or not. Other funding options exist, including the initial public offering (or IPO – “Initial Public Offering”) and venture capital.
The concept of blockchain is at the heart of ICOs. This decentralized technology, based on cryptographic principles, allows for the storage and security of transactions, thus fostering trust in the exchange of digital assets.
Difference between token and share
It is essential to distinguish between a token and a share. A share represents a portion of the company, conferring its holder a right to the profits generated. In contrast, a token is a financial asset providing a right of use or financial link to the project of the issuing company. Thus, while a share represents ownership in the company, the token can offer various advantages, such as access to services, a privileged status, or even one-time revenues similar to dividends.
For example, the Filecoin project illustrates this distinction: it allows users to store files on a network in exchange for tokens that ensure a right of use, particularly for secure and decentralized storage.
How does an ICO work?
When a startup wishes to raise funds via an ICO, it issues tokens based on a blockchain protocol. The company offers a fixed number of tokens, similar to the offering of shares during an initial public offering, and it initiates this process through a crowdfunding campaign, referred to as a “crowdsale.” Key information, such as the launch date, the number of tokens available, or the price, is then disclosed to potential investors.
The issuance of tokens goes through “smart contracts”
Companies often use “smart contracts” to issue tokens. These computer programs automate and secure transactions by ensuring compliance with predefined conditions. The primary strength of these contracts lies in their resilience against attempts at falsification, especially when associated with public blockchains. This reduces the likelihood of disputes and misunderstandings related to traditional agreements.
How does an ICO unfold?
Most ICOs take place in two phases. First, a pre-sale phase, or “pre sale,” may be offered where a limited group of investors can acquire tokens before the main campaign. Then, the ICO opens to the general public, typically in several waves, called “rounds,” where the price or conditions may adapt to attract more investments.
Notably, regulation plays an increasingly crucial role in this area; for example, with the PACTE law of 2019, ICOs must comply with specific regulations in France to better protect investors.
How to invest in an ICO?
Investors can participate in ICOs using cryptocurrencies, such as bitcoin or ether, or sometimes in fiat currencies like euros and dollars. A crucial aspect to consider is the delay that may exist between the investment and the receipt of tokens, which requires good anticipation from participants.
Other technical details about ICOs
It is essential to understand that ICOs are not limited solely to the issuance of tokens. They can also concern the development of new blockchains. Thus, a startup may choose to create its own token based on existing protocols or develop a new blockchain tailored to its specific needs. Furthermore, some companies may decide to forgo an ICO if their pre-sales prove successful. Recently, for example, the messaging app Telegram raised $1.7 billion during pre-sales and subsequently canceled its ICO, thereby satisfying its financial needs without opening the process to the public.
Despite the appeal of funding through ICOs, this environment remains complex and can raise concerns regarding transparency and security, given the number of scams that have plagued this space in recent years. Increased vigilance and support from qualified professionals are therefore strongly recommended to navigate wisely through this new era of fundraising.
