ICO vs IPO: Differences Explained

ICO vs IPO: Differences Explained so That Your Choice Is the Right One

Both IPOs and ICOs are done to raise money for a young company. Both of these forms of financing have been hyped at one time or another. The IPO peak was before the Internet Bubble burst in 1998. There have been many successful and record-breaking IPOs since then, but it never quite captured the fascination of the public at large since those heady times. The same can be said of ICOs. The last year has seen an increase in the amount of money raised, but the excitement in the general public over a form of investment that was never before open to them has died down in recent times.

The basics outlined

The newness of ICOs means that regulatory oversight is somewhat lax. This is improving slowly but is nowhere near the regulatory burdens suffered by traditional firms looking to release an IPO. IPOs also have a history of how they been done, how the due diligence is done and what third parties are trusted in the IPO space. This does not exist with ICOs, which can be put out for an extremely small amount of money (relative to IPOs).

One key difference is that an IPO gives you a share of the company whereas an ICO is aimed at improving adoption of a token. What you get when you buy a token via an ICO is the potential to use it within the network that it was released for the purpose it was released — taking, for example, a company that focuses on decentralized entertainment. Something along the lines of Netflix with BitTorrent's distribution system. Token on the FlixTorrent network would be used to pay content creators for their work. If you bought these after an ICO, they would be far more expensive than if you had bought them at an ICO. IPOs, on the other hand, is relatively simple to explain. You buy a share; you are entitled to a dividend and all sorts of reporting on what the company is doing.

Another key differentiator is the openness of the two forms of financing. IPOs are closed off to the vast majority of people. They are very exclusive, and only the relatively wealthy have any access whatsoever to IPOs. Not everyone can buy Google shares right now, never mind the small (but exceedingly wealthy) pool of initial offering investors when Google was released to the "public."

ICOs, on the other hand, are truly public offerings. Anyone can get involved so long as they have a wallet that accepts the token being released and they have money to spend on Bitcoin or Ethereum for which the tokens are swapped.

Regulations tightening the rules for ICOs

All that said, laws are being formulated to make sure that ICOs are treated as securities for the purpose of regulatory oversight. This will have a tremendous impact on future ICOs and the firms that use them.

Securities are very different from tokens, which can be anything and everything. While the scams that have characterized the ICO landscape up until now will dry up with tighter regulations, it can also harm the health of the industry. Particularly with regards to innovation, which is at an all-time high for blockchain technologies.

Classifying all tokens as securities will severely hamper the way they can be used as an alternative to current problems where blockchain can be a huge disrupting influence. A token can be used in a supply chain focused distributed ledger to maintain the integrity of the supply chain. That becomes impossible if the tokens are automatically classified as securities. These problems are just beginning, and it is ICOs that have to lead to this problem. Sometimes, it would have been better for crypto companies to have stuck to IPOs, at least according to the wider community that does not like where ICOs have lead regulators.

Author: Ali Raza for: Crypto-Rating.com