ICO Vs IPO: Know the Difference

13 Apr 2021  Read 980 Views

So, you have some money in your hand, and you don't know if you should let it sit in the bank or invest it. A common dilemma! Well, the wise have always said, never let your money sit idle in a bank. Let the money work for you.

Cryptocurrencies like bitcoins are slowly taking over the world. Many interesting investing options have popped up. One such investment option is the Initial Coin Offering (ICO) - a type of funding using cryptocurrencies. This article follows our previous articles on ICO basics and the working of ICO tokens.

In today's article, we will discuss the key differences between an ICO and IPO.

Let's get started.

What do you mean by an ICO and an IPO?

Both Initial Coin Offering (ICO) and Initial Public Offering (IPO) machines raise your business funds. So, where do they differ? Well-established companies raise funds using IPOs, whereas new young startups use ICOs for fundraising. To put it in illustrative terms, an IPO may be brought by a 20-year-old company in the pharmaceutical sector. In contrast, an ICO may be brought by an 18-year-old kid with an innovative idea to start his business from his home. 

The pharmaceutical company is well-known, has a stable bank account and a uniform business record. The new startup has neither of the above – the company may be the next APPLE or just nothing. No one knows. 

Investment decision in the established known company (IPO) or a risky new startup (ICO) is based on one underlying intent – the company's business will grow and eventually reap profits in the foreseeable future.

Now that we've an idea about the meaning of ICO and IPO, let's see the differentiating points between the two!

Requirements 

Initial Public Offering (IPO)

Initial Coin Offering (ICO)

  • The companies bringing out an IPO have to fulfil numerous compliances before getting the shares listed.

  • Some of the compliances include (but are not limited to) maintaining a minimum earnings threshold and a good stable business record.

  • An essential part of this lengthy compliance procedure is the preparation and issue of a prospectus.

  • The prospectus contains all the details of the IPO – legal intent to issue shares to the public, critical information of the company's affairs, and the upcoming IPO.

  • The prospectus is made with utmost care as an investor makes their investment decisions based on its information. 

  • The IPO process involves lawyers, banks, and a lot of patience.

  • ICOs are not under the purview of any regulatory mechanism (for now).

  • A white paper is prepared to back up the idea behind the project and convince the potential investors to pitch in some money.

  • There’s no standard format for the white paper.

  • In some countries, white paper is not considered a legal document.

  • The ICO process is shorter than an IPO.

  • The ICO process involves just the programmers and the internet.

 

 

Investor Requirements 

Initial Public Offering (IPO)

Initial Coin Offering (ICO)

  • Investing in an IPO of a company based in your country is a simple procedure.

  • However, if you want to invest in an IPO of a foreign company, you will have to engage the services of a broker.

  • The essential requirement of investing in an ICO is the internet.

  • One can buy tokens from any company based in any country using the internet.

  • It is to be noted that there is one exception to this – specific US projects are defined as securities.

  • Such projects are not open to US citizens to invest in because they would become IPO-like funding, which contradicts ICO's basic foundation.

 

Utility of Investment (Investor Profits)

Initial Public Offering (IPO)

Initial Coin Offering (ICO)

  • The shares acquired through an IPO give an ownership stake in the future earnings of the company to the holders. 

  • The shareholders are entitled to annual dividends based on the company’s yearly performance.

  • One other way to make money through IPOs is to invest in the early stages of the process and sell the shares when the share value increases. 

  • You must remember the essential thing about ICOs – owning coins does not give you ownership in the project/company.

  • The structure of the coin determines how the investors reap benefits from the business venture. There are many ways in which investors can make money in this system.

  • The rules and conditions laid out in the white paper determine the extent of benefits an investor gets from the project.

  • The coin holding may entitle an investor to a fixed price – he can either buy it or sell it or an amount that the investor will get if the company makes more money than a specified amount or simply a right to visit the company eateries to dine.

Now the pertinent question – what is a more secure investment option: ICO or IPO?

From the surface of it, IPOs appear to be safer investment options than ICOs. IPOs are strictly regulated, and the companies are required to adhere to numerous compliances. The IPO process is characterized by transparency and disclosure of information that helps investors make informed investment decisions. But this does not mean that ICOs are less secure. Sure there are no regulations over ICOs, and the venture may either be a resounding success or an utter failure. But even the most stable companies coming up with IPOs may become bankrupt, draining your investment. No one can be sure which investment will be profitable and which one will not. A little scepticism is therefore essential before making an investment decision.

Closing remarks

We've already discussed that one cannot make an absolute prediction about the success or failure of a company/project. You should carefully weigh in the pros and cons of the options before making an investment decision. We attempt to summarise some pros and cons of IPOs and ICOs to help you make informed investment decisions:

Pros (+) and Cons (-)

Pros (+) and Cons (-)

IPO

ICO

Regulatory and legal control

+

-

Company’s track record

+

-

Quick investment

-

+

Smaller investments

-

+

Reliability 

+

-

International accessibility 

-

+

Stay Positive, Test Negative

Happy Investing!

About the Author: Shrey Salwan | 42 Post(s)

Shrey Salwan is an MBA student at FLAME University, Pune, majoring in Marketing. He is also pursuing CA and CS. He is a creative thinker, a grammar nazi, and social media enthusiast seeking to work in the dynamic world of social media and content marketing to transform technical and digital information and processes into influential stories. He has a knack for telling stories and does so through his quirky way of writing.

 

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