The Initial Coin Offering or ICO is a popular fund-raising method in the cryptocurrency space.
Through an ICO, blockchain and cryptocurrency projects can acquire the capital they need by preselling their tokens which allows them to further support their operations and continue developing their project.
ICOs boomed in 2017 but soon were restricted by authorities in different jurisdictions due to their regulatory complexities. This gave rise to other fund-raising methods such as Initial Exchange Offerings or IEOs.
In this article, you will learn about ICOs and how they differ from a conventional IPO. We will also discuss IEOs, which were proposed as an alternative to ICOs.
MasterCoin is believed to be the first project which started raising capital through an ICO. The ICO happened in 2013 when MasterCoin managed to raise more than 5000 Bitcoins worth around $500,000 at the time.
After some small ICOs in between, the prominent ICO of the Ethereum blockchain took place in 2014. Ethereum managed to receive more than 25,000 bitcoins in two weeks, raising more than $15 million during its ICO. The price of Ether, the native cryptocurrency of the Ethereum blockchain, was $0.31 at the time.
The DAO is probably the next infamous project with an outstanding ICO, the first Decentralized Autonomous Organization (DAO) on the Ethereum blockchain. In 2016, the project raised a whopping amount of $150 million during its ICO.
Unlike its successful ICO, the DAO had an unfortunate fate. A vulnerability in the underlying code of the DAO led to a catastrophic hack, causing the project to fail completely. This event eventually caused a hard fork in the Ethereum blockchain, splitting the network into Ethereum and Ethereum Classic.
ICOs reached their peak in 2017 with various projects raising more than $5 billion together. In 2018, Block.one raised $4 billion for its EOSIO platform which is the largest ICO to date. Telegram, the well-known messaging app marked the second-largest ICO in 2018 by selling $1.7 billion of its TON token to private investors.
As ICOs grew considerably, regulators in different countries, such as the U.S. Securities and Exchange Commission (SEC) started exploring their legal status within the jurisdiction.
SEC announced that most ICOs could be considered security sales and therefore illegal as they are not officially registered with the agency.
Telegram’s ICO is a good example here. TON, the proposed token, was labeled as a security by SEC which forced the team “to return more than $1.2 billion to investors and to pay an $18.5 million civil penalty.”
Some countries like South Korea put a blanket ban on the ICOs altogether.
Initial Exchange Offerings or IEOs were introduced as a safer alternative to ICOs. IEOs are a type of ICOs held by a centralized cryptocurrency exchange.
Projects can partner with cryptocurrency exchanges to facilitate their public token sale. Crypto exchanges analyze each project extensively by exploring different aspects of a project like its whitepaper, founding team, and tokenomics, to name a few.
This adds an extra layer of validity to projects; By listing a new token on their platform, crypto exchanges are betting on their reputation as well.
IEOs are beneficial for crypto and blockchain projects as well. By listing their token on a reputable cryptocurrency exchange, projects will be able to present their token to the large, verified users of the platform.