If you have heard of crypto coins, there is a great chance that you have already seen this acronym somewhere. The term, Initial Coin Offering, refers to the mechanisms that a company can use to finance its development in crypto-coins.
ICO came out around 2013 and Ethereum, launched in 2014, is the most successful venture coming from an initial coin offering, which has raised about $ 20 million for its development. Over time, Bitcoin, the most famous of the crypto coins, gained notoriety and leveraged the ICO market.
Through an ICO it is possible to collect capital so that virtual currency is viable for a given organization or segment. It works like this: developers of a crypto-currency will offer investors units of a new currency and charge the payment in Bitcoins or Ethereums. These are two of the most popular virtual currencies in the world – and anyone who has capital based on them and is interested in financing the project can purchase the new crypto coins in just a few minutes.
This is the initial coin offer, as the term suggests, it can roughly be compared to a collective financing. If it works out, all investors win.
Do not expect to find information about an ICO in any financial market newsletter though; as it is not regulated by government entities, the principles of the offer are included in specific forums for that purpose.
The ICO process
Once the developers of newly created crypto-coins make a public call for investments, a website is launched with all the project’s goals, the advantages, the delivery schedule and the team involved in creating the new currency.
All this is to certify to potential investors the veracity and degree of confidence of the project.
From there on the sale of tokens that will be converted into the final currency will start in case the project works. The initial amount of tokens to be sold is pre-established prior to the opening of the offer.
When the project is established, each token sold will transform into securities, shares or even capital within the crypto-currency that was created.
Anyone who wants to invest in a crypto-currency will generally go through the following steps:
– ICO analysis from the site data;
– investment decision;
– registration or pre-registration to become an investor or buyer;
– effective enrollment;
– purchase of tokens.
In general the purchase of tokens is made with crypto-currencies such as Ethereum, Bitcoin or another one at the request of the developers but this does not prevent projects from receiving payments with traditional currency by bank transfers or regular credit card.
There are some people who go through the whole process just to sell and exchange them for Bitcoins upon receiving new crypto-coins. It is a valid choice. Purchasing Bitcoins for “real” money can take time and have extra fee payments which do not exist in exchange for crypto-coins.
For those who have not yet entered the crypto-coins business, participating in an ICO is a quick, easy, and profitable way to get acquainted with it, since the site of each project will contain the specifications of the new currency in question – and with the possibility of exchanging it with existing ones, the process is simplified.
As it was said earlier, the token is the “product” that the investor buys to secure his exchange in credits, bonds or stocks when the ICO is finished and the project is ready to run. It is necessary to pay close attention to the type of token offered within the projects so to understand what benefits they truly bear. After all, once purchased, the token can not be returned until after the crypto coin is completed.
There are tokens that offer profit sharing, voting rights in companies and commissions for use of applications or services, among other advantages. The description of each one is part of a document called whitepaper, available on the project website, and its function is to explain in detail the possibilities to which the investor is entitled if he purchases one or more of a certain token.
In order to choose the right token, investors are advised to observe three points in their offer:
1. Its function;
2. Its characteristics;
3. It’s goal.
Within these three points it is necessary to verify which rights the token holder will be entitled to within the ecosystem he is entering, what its exchange value is, if it can be used as a toll of functionalities within a specific system – if this function is applied to the development in question – and whether the token holders can create their own functions from the use of such key, in the platform offered.
Another suggestion is to pay attention to the feasibility of the currency, to understand whether it can be used for transactions within and / or outside the ecosystem determined by the developers, as well as equitably distributing the financial benefits that may relate to the project.
In general terms, the more purposes the token has the more valuable it is. But before buying it it is imperative that the investor submits the project offered for testing. The goal is to ensure that the viability of the promises contained in the whitepaper is real. The most famous test for this purpose is the Howey test.
Based on a 1946 American legal case, the Howey test is used to determine to what extent a transaction is in fact an investment contract. Through it the points of the contract are checked and only deemed an “investment” if they meet very specific criteria.
– whether the transaction verifies an investment of money;
– if such investment is in a joint venture (horizontal, with external investors);
– whether there is an expectation of profit from the producers’ work.
When all three criteria are met and demonstrate positive indicators, it means it is safe to join in the ICO. Other tests may be carried out in accordance with the investor’s intentions in order to detect the security of its financing.
After joining the ICO, there are two types of tokens that hold the main benefits attached to the coin offer: the Token Utility and the Security Token.
The Utility Token is a rating for titles that do not qualify through the Howey test. In that case, they will only provide products and / or services to their users. The most common concessions for a Utility Token – which is mainly a utilitarian port – is the right to use the network that harbors the ecosystem in question and its full benefit.
Security Tokens on the other hand are much more complete – and we’ll talk about it in richer details as follow.
Security Token and Security Token Offering
A crypto method that passes the Howey test will, by definition, become a security token. Its sale value is derived from an external and traded asset and will function as a purchase warranty and be subject to transferable securities and federal regulations whenever the rules are applicable.
That is, in order for developers to create a Security Token, they must respond to a series of pre-established regulations. The closer such regulations are met the more valuable a Security Token becomes, giving the investor the ability to make even more money through it.
In the United States for example, Security Tokens follow regulations D, A + and S.
Regulation D concerns the permission granted to the developers in order to be able to offer tokens for their crypto coin project. The A + regulation ensures developers are able to offer proven security to investors for purchase requests of up to $ 50 million in investment. It also acts as a record of security and reliability. Regulation S is aimed at registering security offers executed outside the United States.
In a comprehensive way, the Security Token as well as its offer – or as to say, the Security Token Offering – are important to give credibility to the project. When an ICO goes through the specific certifications of its home country, this means that investors can rely on the viability of the project they are funding.
They can also improve the way financial transactions are made and speed up the processes for executing such transactions by removing the middleman between the project and the investor. Through the token, investors have direct access to the details of the project.
Finally, the more reliable a project is the easier it will be to liquidate the Security Tokens or the actions and / or other benefits gained from the purchase of these devices as they only tend to gain value over time.
In conclusion an ICO is a good form of investment for anyone who wants to start investing or increase their investments in crypto-coins and one of the best ways to choose the right initial offer is through the Security Token tests. The better the test results, the better the ICO.
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