What is an ICO and what is an IPO? What are the similarities and differences between them? How do I know which company to pick if I am going to start investing? I get asked a lot regarding these and a few other questions by a lot of people, especially family and friends. This is due to my experience in investing in some projects. I am going to share what I know and today we will delve deeper on one of the main questions I always get asked. If you are already a seasoned investor or even a newbie who is interested in starting, pay close attention as we will be discussing this topic.
Initial Public Offering, or more commonly known as IPO, is done by more established companies to gain investors in the said project. IPOs are a way for them to go public from being a private owned entity. They would open up their capital and people would have a chance to buy in, thus owning a market share for that business. IPOs are heavily regulated and it is watched by the Securities and Exchange Commission. They have stricter rules such as background checks so that a company knows that you are financially capable, and is not using the IPO as a way to launder money.
The process for an initial public offering is a long and arduous one. Before going into an IPO, the company must already be established, has a financial backing behind it, and should already be generating revenue. The filing process for IPOs takes months to even years on some occasion. This involves lawyers, bankers, underwriters and regulatory commissions such as the SEC. They would be offered on a market such as the New York Stock Exchange.
The reasons for opening up an IPO for most companies is not for startup capital, but it is more on working or a long term capital or some cases, liquidity. This usually happens at a later stage in their development. A perfect example of this case is Fender Musical Instruments Inc. Fender has been a private company that was established way back in 1946. It is not only until 2012 when they announced their $200 million IPO for the company.
Being an investor for a company that is from an IPO, you have a say on which direction the company goes by voting rights. As long as you own a share, you have voting rights for its direction and development. You also get a fancy tag as a stock holder for that particular brand. You are also protected by regulatory agencies in the case of misappropriation of funds that was made by the business. You get this protection because at the time of purchasing the stocks, you are entering a legally binding contract with the said business who is selling their shares.
The drawback for an IPO investor is the small returns of investment as they are already established. You do sometimes get lucky and get a big return if you were one of the first investors for the offering or if the IPO becomes successful.
Now, let’s head over to Initial Coin Offering, or more commonly known as ICO. ICOs exploded in the recent years with a multitude of companies releasing their own versions of tokens left and right. It is more associated with the Blockchain technology, and even some companies nowadays who have nothing to do with Blockchain gets launched because of the recent wave of success ICOs get.
ICOs are usually utilized by the project to gather startup capital, or initial investments to actually start the project. This is in most cases non regulated by regulatory commissions and starting up an ICO just takes less time than IPOs. The token sale is offered on its own website where you just need to log in and invest your money. The tokens you get are usually sold on a secondary market like Poloniex or Bittrex to get your return of investment back.
ICOs differ greatly from IPO since the coin offering, or token sale is launched very early for project development. This means that it is a way to gather Angel investors, and they give you tokens or coins as gratitude for investing in the company. They are not able to offer shares 99% of the time as they are not an established organization yet pre ICO. Most of these companies release their roadmap and developmental plans on a document called white paper. This is where you do most of your research on the technology that they will be offering. Perfect examples of successful ICOs are Ethereum and Monero back in 2014.
Another difference that ICO has with its counterpart is that you do not have control or influence on the direction or development of the company who uses your investment. There are no background checks that happens during ICO, thus anyone with enough money can be an investor. The tokens themselves are not considered as shares in but as IOUs with no financial responsibility going back to the company in case they misappropriate the funds. The caveat however is that if the business becomes successful just like Ethereum or Monero, you will see a considerable return of investment as these coins are offered pennies to the dollar at launch time. This is considered as a very high risk, high reward type of investment.
Now that we do know the differences between ICO and IPO, it is up to you to decide on where and how you will invest your money. I will however offer these few tips for you guys. Always do research what kind of company you are investing your money in. Do not get affected by hype and only invest using money that you can safely lose. Never ever plunge your life savings on a single project because if the project goes south, you will be left with nothing at all. For more experienced investors, it is always better to diversify. A larger portfolio means larger returns of investment. With all that said, I wish you all good luck and happy trading!