As an initial public offering (IPO) in security markets, Initial Coin Offering (ICO) is used as an efficient fund-raising solution for creating new products or services in cryptocurrency industry.
The terms and conditions of an ICO are outlined in a document (also called white-paper) which specifies:
• The aim of the ICO project,
• Financial volumes of transactions and the specific goal or limit for funding,
• Amount of virtual tokens that will be kept by founders,
• The accepted payment types, and
• The duration of ICO.
ICO investors must purchase tokens with pre-existing conditions. The distribution of ICO tokens to investors depends upon funds received. If the host company’s financial needs do not satisfy with ICO’s financial result, ICO could be cancelled and raised funds could be repayed to investors.
There are three main types of ICO structure:
• Static pool; which has a pre-set price and a limited number of tokens,
• Dynamic pool; which has a dynamic price and a limited number of tokens,
• Dynamic pool with a pre-set price; which pre-sets price and a dynamic number of token.
Furthermore, there are ICOs that can be performed only to a limited number of accredited investors (private ICO) to reach a minimum investment amount, or can be performed as a crowdfunding activity which targets regular investors (public ICO). The first ICO was performed in 2013 by the Mastercoin project, on Bitcoin blockchain with P2P crowdfunding purposes and raised around 500.000 USD worth of Bitcoin.
The regulatory background in ICOs is still under discussion and practices vary from one country to another. ICOs are prohibited by regulatory bodies of China and South Korea. On the other hand, Australia, New Zealand, Hong Kong and UAE published regulatory guidelines for ICOs. The European Union countries, the U.S.A. and Canada are still working on implementation of a strict regulatory perspective. Even though ICOs are not regulated due to their decentralised nature, regulatory bodies can participate in the process to prevent any potential illegal activities of host companies or developers.
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