FINANCIAL EDUCATION

[ICO vs IPO]: Know the Difference

In recent years, both IPOs and ICO became famous. Thanks to the rising bull markets. In the first half of the year itself, 22 Indian companies came up with their initial public offering and raised around 26000 crores. IPO rain still may continue. Another 30 companies are in queue to launch their IPOs. That is the same case with the ICOs (initial coin offerings) too. 

But what is an ICO and what is an IPO? What is the difference between ICO and IPO? Which is better? Which is safe? In this article, we are going to answer all these questions also explain about ICO vs IPO

What is an IPO?

The full form of IPO is Initial Public Offering. IPO is a method using which companies come into public. When a business/company is small, it usually expands its operation using its profits. But there are many ways using which companies can raise money and IPO is one such way.

Whenever a company wants to go public for the first time, it will issue an IPO. Using IPOs, companies/businesses sell their shares to individual investors. The shares which are held by private investors, families, owners will be now held by retail investors, promoters, domestic and foreign institutions etc. After the issuance of the IPO, the shareholding pattern of the company changes.

An IPO can be a fresh issue of shares or an offer for sale. What is the difference between both of them?

1. Fresh Issue

If an IPO is a fresh issue, the company issues new shares to the public investors. After a fresh issue, the percentage holding of existing shareholders decreases and share capital increases. Due to fresh issues, earnings per share of the old investors decreases. After the IPO, the profit needs to be shared among all investors equally.

2. Offer for Sale

Offer for sale is issued when an existing shareholder of the company wants to sell a part of their holdings to the public. It does not issue new shares. So, there will be no changes in the share capital. The money raised through an offer for sales will go to the shareholder who is selling his/her holding but not to the company. After an offer for sale, the holding percentage of shares of the investor who is selling the share reduces.

3. Follow-on Public Offer

The listed companies go for an IPO through a follow-on public offer. Companies issue this kind of IPOs for two reasons. The first one is to raise additional capital. The second reason is to balance the shareholding between the public and management.

What is an ICO?

The full form of ICO is Initial Coin Offering. ICO is similar to an IPO. But the difference between them is that an IPO is issued for shares of a company but ICO is launched for funding cryptocurrencies and startup ideas.

If a company needs money to develop and launch a crypto coin or an app or any product/service go for Initial Coin Offering. Investors interested in that crypto coin or product can offer funds through ICO. In return, the company provides tokens for its products/services or as a share in the company.

Whenever a startup/company wants to raise funds, they will create a white paper. In the white paper, they will mention all the details of the project. The details include the fund size required to complete the project, accepted currency, the number of tokens that will be issued, how long the ICO campaign will run etc. After the campaign is completed, if the funds received do not match the required amount, the campaign is considered a failure and funds will be returned back to the investors.

ICO Structure

ICO can be launched in two different structures.

1. Static Pool

ICOs launched using a static pool structure have a specific goal/limit in terms of funding. That means, the tokens which were sold will have a fixed/pre-set price and only a fixed number of tokens will be issued. Both price and quantity of the tokens are static/fixed.

2. Dynamic Pool

The dynamic pool is divided into two types i.e., a dynamic pool with a dynamic price and a fixed number of tokens, a dynamic pool with fixed/static price and a dynamic number of tokens. In the first case, If more funding is received the token price would be higher. In the second case, token price is static but the quantity keeps on changing based on the funding. Know more about of ICOs here.

ICO vs IPO

ICO IPO
1. ICO does not come under any regulatory authorities.
2. Companies use white paper to project the details of the project and use it to convince the investors.
3. The white paper has no particular format.
4. The white paper is considered a legal document in many countries.ICO can be launched using the internet and programmers.
5. Investing in ICO is not that easy because some companies do not accept all currencies.
6. Not all the tokens issued through ICO offer ownership of the company.
7. Chances of fraud are high. The funded amount can be lost.
8. Tokens that are issued through ICO do not have any intrinsic value or legal guarantee.
1. To launch an IPO, the company should satisfy the requirements that are issued by the regulatory authorities.
2. Issuing an IPO is a tedious and complicated process.
3. Issuing IPOs is legal.
4. Auditors, banks, regulating authorities etc are involved while issuing an IPO of a company.
5. Investing in an IPO is easy with a demat account.
6. Shares issued through IPO provide partial ownership of the company.
7. The chances of fraud and losing the invested capital is less.
8. Shares issued through IPO have intrinsic value.
ICO vs IPO

These are some of the differences between ICO and IPO (ICO vs IPO)

4 things to consider before investing in ICO

  1. Check whether project developers can properly describe their objectives or not. Successful ICOs generally have simple, comprehensible whitepapers with specific, measurable goals.
  2. Learn about the creators. Investors should expect complete openness from a firm establishing an ICO.
  3. Look for the ICO’s legal terms and conditions. Because regulators do not typically monitor this area, it is up to an investor to guarantee that each ICO is legitimate.
  4. Make sure to keep ICO funds in an escrow wallet. This is a wallet that requires several keys to access it. This is an effective anti-spam measure, especially when a neutral third party has one of the keys.

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