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ICO vs. IPO: Understanding the Difference

Although both serve the purpose of companies for capital raising ICOs and IPOs are similar in function, they are very different in execution, regulation, and investor participation. To help you understand their similarities and differences in this guide we are going to explore IPOs vs ICOs.

Definition

  • ICO: ICO is a method of fund raising that is typically used to advance a new digital currency / cryptocurrency project. The most common tokens issued in these types of crowdfunding are utility tokens and its another variant ownership crowd funding.
  • IPO: The IPO is the first offering of shares of stock to the public by a private company to raise capital, which allows the public to purchase a company's ownership interest.

Regulatory Environment

  • ICO: ICOs are less regulated in comparison to the IPO with slight oversight from regulatory bodies. A patchwork of jurisdictions have issued ICO-specific guidance or introduced laws that apply to some or all ICOs, but the regulatory landscape continues to evolve.
  • IPO: IPOs are heavily regulated by well-established government agencies, such as the Securities and Exchange Commission (SEC) in the United States, and when a company makes its IPO, it is required to meet very specific criteria and disclose certain specific information according to the law of the country. Before going public, companies have to satisfy a considerable amount of due diligence, audits, and regulatory approvals.

Investor Participation

  • ICO: ICOs have all but two types of investor - the retail investors, accredited investors, and institutional investors. Anybody with an internet connection and cryptocurrency can normally participate in an ICO, giving investors across the board access.
  • IPO: An initial public offering or public float is where shares in the private company are first sold to the general public. Those IPO shares are subject to underwriting arrangements and often allocated to institutional investors, leaving some retail investors with nothing.

Ownership and Governance

  • ICO: The mass purchase of a cryptocurrency in return for legal tender or other virtual currencies developed to help fund the company behind the cryptocurrency. On the other hand, token holders usually do not have traditional ownership rights or any say in the governance of the project.
  • IPO: An IPO is when investors buy stock in the company, that stock is then the voting and ownership interest in the company governance. Shareholders can vote on company matters like electing members to the board, and also can receive dividends or join a stock buyback.

Risk and Return

  • ICO: For ICO investment, the risk is also much higher due to the absence of supervision and control from the above parties, as well as a huge uncertainty and lack of transparency and investor protection. Investing in ICO can give a high return, but there are high risks too, so the investor has to do his Due diligence and research about the project.
  • IPO: Investing in an IPO is usually less risky than an ICO because of the many regulatory requirements and oversight. But that said, IPOs are risky and dynamics such as market volatility, business performance, regulatory and compliance issues play a part.

Conclusion

Whilst they appear similar and provide a means of companies to raise capital, other forms of the stock market, ICOs and IPOs are inherently different in many ways ranging from regulatory oversight, investor participation, ownership structure and risk profile.

ICOs constitute a more open and far-reaching capital raising vehicle, whereas IPOs come with an additional layer of regulatory oversight, and enshrined ownership rights in the hands of participants. It is important for those investing in ICOs and companies looking to raise funds in the capital markets to be aware of the differences between ICOs and IPOs.

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