Initial Coin Offering Initial Public Offering

For traditional companies, there are a few ways of going about raising the funds necessary for development and expansion. A company can start small and grow as its profits allow, remaining beholden only to company owners. However, this also means they may have to wait a long time for funds to build up. Alternately, companies can look to outside investors for early support, providing them a quick influx of cash—but typically coming with the trade-off of giving away a portion of ownership stake. Another method is to go public, earning funds from individual investors by selling shares through an IPO.

While IPOs deal purely with investors, ICOs may deal with supporters that are keen to invest in a new project, much like a crowdfunding event. But ICOs differ from crowdfunding in that the backers of ICOs are motivated by a prospective return on their investments while the funds raised in crowdfunding campaigns are basically donations. For these reasons, ICOs are referred to as “crowdsales.”

ICOs also retain at least two important structural differences from IPOs. First, ICOs are largely unregulated, meaning that government organizations like the Securities and Exchange Commission (SEC) do not oversee them.3 Secondly, due to their decentralization and lack of regulation, ICOs are much freer in terms of structure than IPOs.

ICOs can be structured in a variety of ways. In some cases, a company sets a specific goal or limit for its funding, which means that each token sold in the ICO has a pre-set price and that the total token supply is static. In other cases, there is a static supply of ICO tokens but a dynamic funding goal—this means that the distribution of tokens to investors will be dependent upon the funds received (i.e. the more total funds received in the ICO, the higher the overall token price). 

Still, others have a dynamic token supply which is determined according to the amount of funding received. In these cases, the price of a token is static, but there is no limit to the number of total tokens (save for parameters like ICO length). These different types of ICOs are illustrated below.