Takeaways
- Initial Coin Offerings (ICOs) are how crypto startups raise money for new projects.
- ICOs are similar to IPOs, but coins are issued instead of equity.
- ICOs have made investors high returns, while others have failed.
- ICOs are generally considered security offerings and regulated by the SEC.
- ICOs provide proceeds to develop crypto platforms, services, technology suites, and finance company development.
What Is an Initial Coin Offering?
Initial Coin Offerings, or ICO, have become an increasingly popular way for cryptocurrency startups to raise capital by selling digital tokens to investors. An initial coin offering is the cryptocurrency industry’s equivalent of an initial public offering (IPO) for publicly traded companies.
Similar in spirit to IPOs and crowdfunding campaigns, ICOs allow investors to buy into a new cryptocurrency-related project, platform, or coin early. Investors can use cash or cryptocurrencies like Bitcoin or Ethereum to invest in an ICO. Instead of receiving equity in the company, investors receive tokens (coins) that can increase in value or be used within the project or company's ecosystem.
Read More: 7 Ways to Buy Bitcoin
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How an Initial Coin Offering Works
An ICO typically starts with a “white paper,” which is a kind of pitch deck. This crucial document allows the project promoters to outline the project's objectives, the problem they are trying to solve, the amount of money being raised, the duration of the ICO, and how the tokens will be distributed. Investors analyze these details before deciding to participate.
During the ICO period, investors purchase digital tokens in exchange for cash, cryptocurrencies, or other crypto assets.[1] Once the ICO period ends, the project developers distribute tokens to investors, often hoping these tokens will later be listed on crypto exchanges. Investors can trade tokens if listed successfully, ideally at a capital gain if the project gains traction.
ICOs generally have two stages:
- Private ICO: Limited to accredited investors and institutions, often offering tokens at a discounted rate.
- Public ICO: Open to the general public, typically priced slightly higher than private sales but still at an early-stage discount.
The project teams use funds raised through ICOs to develop their technology platforms, launch marketing campaigns, and grow their businesses.
Smart Tip:
In 2024, 96% of financial advisors have received questions about cryptocurrencies.[2]
Examples of ICOs
One of the most famous ICOs is Ethereum, which launched in 2014. Ethereum raised over $18 million in Bitcoin, kickstarting one of the most valuable blockchain platforms.[3] Investors in Ethereum's ICO who held onto their tokens saw massive returns as Ethereum's value skyrocketed.
Another notable initial coin offering was EOS, which raised a staggering $4 billion over one year in 2018.[4] EOS aimed to create a decentralized operating system to support industrial-scale decentralized applications. Despite regulatory hurdles, EOS has become widely used in blockchain development.
Is Investing in an ICO Smart?
Investing in initial coin offerings (ICOs) can be highly profitable, but like all investing, it is fraught with investment risk. Early investors in successful ICOs like Ethereum have enjoyed remarkable returns. However, the lack of regulation, limited investor protection, and prevalence of fraudulent or overly ambitious projects make ICOs a highly speculative investment route.
Before investing in an ICO, you should thoroughly research the project, including the team behind it, their roadmap to success, and how realistic their goals are. It is wise only to invest money you're prepared to lose—as even promising projects can falter due to technical challenges or poor management.
Related: 7 Alternative Investments for 2025
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Are ICOs Regulated?
Initial Coin Offerings are notoriously underregulated, though this is gradually changing. Initially, ICOs operated largely outside traditional financial regulation, leading to scams, fraud, and significant investor losses. Regulatory bodies worldwide have begun scrutinizing ICOs more closely.
In the U.S., the Securities and Exchange Commission (SEC) has increasingly classified specific ICO tokens as securities, subjecting them to securities laws. ICOs deemed securities must register with the SEC or face significant legal action.
A notable ICO with backlash was Telegram's $1.7 billion ICO, which the SEC halted. Not only did the money have to be returned to investors, Telegram was fined $18.5 million.[5]
ICOs vs. IPOs
While ICOs may sound similar to Initial Public Offerings (IPOs), they differ considerably. IPOs involve selling shares in a company to public investors, providing ownership and sometimes voting rights. IPOs undergo rigorous regulatory oversight and detailed financial disclosures involving established financial institutions and investment banks.
In contrast, ICOs offer digital tokens that typically don't represent equity in the company. Investors in ICOs usually do not gain voting rights or control over company decisions. ICOs require far less regulatory oversight—though this is slowly changing—and typically involve smaller, tech-focused startups.
Here are the key differences between ICOs and IPOs:
- Regulation: IPOs are heavily regulated by the SEC, whereas ICOs traditionally lack strong oversight.
- Investor rights: ICO investors usually get tokens with limited initial utility. IPO investors get ownership and sometimes voting rights. (Read more about common stock).
- Due diligence: IPOs involve extensive auditing and financial transparency. ICOs often rely on limited documentation and investor trust.
- Accessibility: ICOs are more accessible to average and retail investors globally, often requiring minimal investments, whereas IPOs typically target accredited or institutional investors.
Smart Summary
Initial coin offerings have reshaped how crypto startups raise capital, offering exciting new opportunities that come with significant risks. Investors drawn to ICOs by stories of becoming overnight millionaires should consider balancing their enthusiasm with caution. Due diligence, careful analysis, and realistic expectations are crucial when considering ICO investments. As regulation evolves, ICOs will likely become safer and potentially even more influential in funding the crypto ecosystem.
Frequently Asked Questions
Virtually anyone can launch an initial coin offering. With a lower barrier to entry than a traditional IPO, companies usually have to meet less of a regulatory hurdle. You can check out the list of recent IPOs in most Online Brokerage Accounts.
Allocating a portion of your investment portfolio to alternative assets can be a smart money move. Many financial advisors advocate for a diversified position in digital assets like cryptocurrencies.
Yes. The ICO could fail if the project promoters cannot reach the minimum investment amount stipulated by the ICO’s criteria. In this scenario, investors would receive their investment back.
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(1) European Parliament. Understanding initial coin offerings. Last Accessed March 24, 2025.
(2) Bitwise. The Bitwise/VettaFi 2025 Benchmark Survey of Financial Advisor Attitudes Toward Crypto Assets. Last Accessed March 24, 2025.
(3) Coincodex. Ethereum (ETH) ICO. Last Accessed March 24, 2025.
(4) CoinDesk.The First Yearlong ICO for EOS Raised $4 Billion. The Second? Just $2.8 Million. Last Accessed March 24, 2025.
(5) Securities and Exchange Commission. Telegram to Return $1.2 Billion to Investors and Pay $18.5 Million Penalty to Settle SEC Charges. Last Accessed March 24, 2025
