Initial Coin Offerings
Initial coin offerings (ICO) are a new form of financing that startups can use. Many entrepreneurs succeeded in raising funds this way. Initial coin offerings consist of issuing virtual currencies known as tokens in exchange for investments in fiat currency received from investors.
ICOs are based on Distributed Ledger Technology, the Blockchain, a technology considered secure and allowing the confirmation of transactions in a permanent and verifiable way.
There are many advantages when getting financing through Initial Coin Offerings.
Getting More Funding
The use of innovative applications and automatization through Blockchain can generate much higher gains than a traditional initial public offer (IPO). In theory, such gains can be shared between companies and investors, translating into lower costs than initial public offers.
Efficiency
The most important advantage is efficiency; an initial coin offering facilitates the investing process without the need for any central authority or an intermediary (government, bank, public institution), thus allowing a high efficiency. In addition, the lack of an intermediary in an ICO results in distributing control of the financing among the token holders instead of concentrating decision-making power in the hands of investors – like it happens when banks are involved in financing debt.
Faster Funding
Depending on the jurisdiction, the lack of requirements for registration and publication reduces the costs and increases the speed of obtaining the funds.
ICOs are easy to be monitored
Another significant advantage of tokens from initial coin offerings is the technology behind them. Because the tokens issued are cryptographically secured, and since they are based on Blockchain technology, they are transparent and secure. In addition, the use of smart contracts can reduce the risk, as the programming of such applications guarantees the automatic execution of a transaction under predefined contractual conditions.
Access to more investors
In addition to cost savings, financing through initial coin offerings gives startups direct access to an unlimited number of investors. Initial coin offerings are communicated directly to the public on a global scale, without any restriction or limitation on the type of investor. Some startups choose to add their restriction depending on what their plans for the future are.
Disadvantages of Initial Coin Offerings
Investments in tokens are difficult to record in accounting
Initial coin offerings are complicated to fit into international accounting standards, not falling within the traditional investment.
High Volatility
The high volatility of the price of a particular token can represent a high risk for the company that issues such tokens. In addition, it can accentuate the unpredictability of pricing for the product or service offered by the company.
Lack of Regulation
The startups must assume the most important risk is the lack of ICO regulation at the state level. There are no regulations on the rights and obligations of token issuers. In the absence of clarity around the regulatory environment applicable to Blockchain technology, there will be a low level of understanding of initial coin offerings.
Not suitable for every investor
Due to the high volatility of the price and their non-regulation, initial coin offerings are considered high-risk investments and are not suitable for any investor. Investors should have both financial education and an understanding of cryptocurrencies or Blockchain technology.
High risk of fraud or cyber attack
Although the trading system is considered secure, the lack of transparency regarding the regulation induces a high risk of fraud or cyber attack. In addition, investors’ rights to obtain possible compensation or compensation are unclear and potentially limited due to legal uncertainty.
