What Is An IPO?
Before an IPO, a company is private. A company usually has four investing stages. The company collects funds from family, friends, or leverages the owner’s savings in the first stage. Angel investors put their money into the company in the next stage. In the third stage, venture capitalists come into play.
Now, even after all these fundings, if the company needs more capital, it announces IPO or initial public offering.
The company gets access to raise huge funds through initial coin offerings, rendering the company a greater ability to grow and expand.
Now, what is the requirement of an IPO? IPO helps the company to raise private equity. The company has various reasons to raise an IPO, such as the company might want to expand itself or renew its existing products, the existing might want to exit the company or the company simply just wants to pay their debts.
There is a whole process involved in IPO, let’s discuss these steps in brief:
An investment bank will guide the company on its IPO and offer underwriting services. Companies look for specific criteria in every investment bank, such as:
- Research Quality
- Industry expertise.
- Company’s prior history with other investment banks.
- Due diligence and regulatory filings
Underwriting is an essential process in which the underwriter (investment bank) acts as a broker between the company launching its IPO and the investors, helping the issuing company sell its set of shares. The available company has the following underwriting arrangements available:
- Syndicate of Underwriters.
Once the SEC approves the IPO, the effective date is chosen. However, the offer price is decided a day prior to the effective date by the issuing company and the underwriter, along with the number of shares to be sold. The offering price, however, is affected by certain factors such as:
- The aim of the company.
- The success/failure of the roadshows.
- Condition of the market economy.
The underwriter provides analysts recommendations after-market stabilization and builds a market for the stock issued once the issue has been carried to the market.
In the short period that stabilization activities occur, the underwriter has the liberty to trade and influence the price of the issue because prohibitions against price manipulation are discontinued.
- Transition to Market Competition
Transition to market competition is the final stage of the IPO process, after the “quiet period” mandated by the SEC ends, the last stage in the IPO process starts.
Investors depend on market forces “transitioning” from relying on the mandated disclosures during this transition period to collecting information about the shares.
What Is An ICO?
ICO stands for Initial Coin Offering and is considered to be equivalent to IPO. Through Initial Coin Offering, investors raise funds to develop their own coins.
ICOs aren’t regulated by the governments, leading to many rug pull cases. Rug pull is the process where a developer raises money and never actually develops a coin.
Since ICOs aren’t regulated by the government, anyone can create them. For creating an ICO, you would first need a whitepaper:
A whitepaper is a document where you explain what problem your ICO solves. In addition, it also includes the long term goals of the project, the code of the project, what makes it different, marketing plans and much more.
The coin developer would need to market their project to attract investors as a next step. Interested individuals can market their products on various crypto platforms. The developers should market their product during the marketing phase by telling investors how their coin is unique and why they should invest in it.
Now, the question arises how an ICO is beneficial for investors? Investors get early access to the product at a lower price. After its release, they can sell their coin at a profit.
If we look at the history of ICOs, they have yielded a profit for the investors. However, many have turned out to be rug pulls.
Investors who buy into an initial coin offering get the new cryptocurrency token issued by the company. The token usually comes with some utility related to the product or service offered by the company. Nonetheless, it can just be a representation of their stake in the company or project.
Initial Coin Offering (ICO) vs Initial Public Offering (IPO)
Investing in ICO is simple, it just requires an Internet connection. Using the internet, buyers can buy a token from any country. Investing in an IPO is a simple procedure, however, to invest in an IPO of a foreign company, the investors would need the services of a broker.
The primary difference between both the processes (IPO and ICO) is that the investors do not get an ownership stake in the crypto project or company. ICOs are riskier as they initially are worthless currency whose value may or may not increase above its original purchase price.
While ICOs are unregulated, IPOs are highly regulated by government entities such as the SEC or the Securities and Exchange Commission.
ICO’s flexible structure is mainly because of the decentralized nature of crypto combined with the lack of regulation. However, the structure of IPOs and ICOs are mainly similar.
ICOs usually get their investing from risk-prone investors who want to invest in an exciting project. In contrast, IPOs get their funds from rather conservative investors who want to earn a stable profit. ICOs promise a financial gain over time, contrary to crowdfunding that just offers donations. ICOs are also called “crowdsales” since they offer the possibility of financial gain.
There is, however, one common link in both the process that investors are bullish and expect the asset’s value to rise over time.