The old ways of undertaking capital raises are being challenged by the growing usage of prospectus-exempt offerings and Initial Coin Offerings (ICOs), which have become more popular with time. Platforms like the bitcoin revolution updated website offer numerous trading options and help you start the bitcoin trading journey without any dedicated training. The below-listed portion will discuss what ICO is and why ICO can overtake traditional means of crowdfunding.
It will compare traditional means such as equity, debt, share funding, and ICOS. The differences between these two modes involve significant financial and legal risks to be borne in mind before proceeding any further into this route. It also discusses the challenges Blockchain start-ups face in raising money through ICOs.
Table of Contents
What is ICO?
It is a form of crowdfunding mechanism that has revolutionized the financial landscape by enabling start-ups to raise funds from a global community of investors. The fund-raising mechanism was designed to enable start-up companies to obtain funding in exchange for tokens created on a Blockchain.
Accordingly, there are some critical differences between ICO and traditional means of funding. The most significant difference is the way cryptocurrency funds are raised through ICOs. Most of the time, fund-raising happens through debt instruments such as bonds and equity securities which generally take 4-5 years to mature before they can be redeemed or converted into cash.
However, no such restrictions are applied to cryptocurrency, as it is an unregulated currency that users can convert into cash immediately after its issuance. Furthermore, ICOs can be used by stratus to fund the development of a new product or service. This way, they can bypass the traditional financial system of banks and become self-sustainable in the future.
The main advantage of ICOs is that they can enable start-ups to raise capital much faster and more efficiently than alternative funds, such as debt financing and equity investments. In addition, since no intermediaries are involved, processes are more flexible and transparent, thus providing better data transparency deemed necessary in evolving financial markets.
A significant difference between ICOs and traditional means of crowdfunding:
The traditional means of raising capital involves financing shareholders in the business. Therefore, it creates an obligation to repay the shareholders with earnings and profits. On the other hand, ICOs offer no such guarantees or obligations since any funds raised are considered a donation to a project. Any funds that remain unclaimed or have been abandoned can be used by the cryptocurrency exchange where they were issued.
ICOs involve risks different from those associated with traditional crowdfunding methods. The main risk is that regulatory authorities may, in future, define ICOs as securities issuance and thus subject them to regulations which will limit their flexibility and expand the number of mandatory disclosures required to attract investors, as China did in 2017.
Advantages of ICOs over traditional methods of crowdfunding:
ICOS offers a vast crowd of diverse investors with a considerable sum of capital that start-ups can use as working capital. This way, start-ups can use the money raised to develop their product, thus reducing the time and cost involved in raising money for investment through traditional means.
If an ICO experiences legal or regulatory challenges, it has no obligation or involvement with them since any contract to the contributors does not bind it. However, if lenders doubt the financial stability of the business they are investing in, they may lose their contributions even after several years have passed. In addition, traditional crowdfunding methods involve high costs, including intermediary charges paid to banks and other financial institutions to issue bonds or shares.
Challenges faced by initial coin offerings in the past:
There are some challenges that ICOs face in the short and long term, which include the following:
Legal risks:
There is no guaranteed protection from financial losses when issuing digital currency due to the legal risks involved. The main risk is that cryptocurrency exchanges may be considered a security and come under the regulation of Federal Securities Laws which may not be favourable to ICOs.
These laws restrict the ability of early investors from reselling their tokens for a considerable time. Moreover, it implies that investors cannot monitor their investments as before since any transactions by them will trigger alerts on all parties involved when using the traditional means of fund-raising such as share offerings or bond issuance etc.
Regulatory risks:
There are several regulatory uncertainties in the blockchain and cryptocurrency space. A major one is whether regulators will recognize cryptocurrencies as assets or securities that require some form of regulation. It can affect the fundamental nature of ICOs for freely raising funds through this technique.
In a short initial, coin offering accounts as a fundamental way to raise funds from investors as the traditional means of crowdfunding allow merely mainstream companies to acquire funding from the investor.
