What is an 'Initial Public Offering - IPO'

An initial public offering (IPO) is the first time that the stock of a private company
is offered to the public. IPOs are often issued by smaller, younger companies seeking
capital to expand, but they can also be done by large privately owned companies
looking to become publicly traded. In an IPO, the issuer obtains the assistance of an
underwriting firm, which helps determine what type of security to issue, the best offering
price, the amount of shares to be issued and the time to bring it to market.
Prior to an IPO the company is considered private, with a relatively small
number of shareholders made up primarily of early investors (such as the founders,
their families and friends) and professional investors (such as venture capitalists or
angel investors). The public, on the other hand, consists of everybody else – any
individual or institutional investor who wasn’t involved in the early days of the company
and who is interested in buying shares of the company. Until a company’s stock is
offered for sale to the public, the public is unable to invest in it. You can potentially
approach the owners of a private company about investing, but they're not obligated to
sell you anything. Public companies, on the other hand, have sold at least a portion of
their shares to the public to be traded on a stock exchange. This is why an IPO is also
referred to as "going public."
Details about 'Initial Public Offering - IPO'
An IPO is also referred to as a public offering. When a company initiates the IPO
process, a very specific set of events occurs. The chosen underwriters facilitate all of
these steps.
• An external IPO team is formed, consisting of an underwriter, lawyers, certified
public accountants (CPAs) and Securities and Exchange Commission (SEC) experts.
• Information regarding the company is compiled, including financial performance
and expected future operations. This becomes part of the company prospectus, which is
circulated for review.
• The financial statements are submitted for official audit.
• The company files its prospectus with the SEC and sets a date for the offering.

The Risk of Investing in an IPO

IPOs can be a risky investment. For the individual investor, it is tough to predict
what the stock will do on its initial day of trading and in the near future because there is
often little historical data to use to analyze the company. Also, most IPOs are for
companies that are going through a transitory growth period, which means that they are
subject to additional uncertainty regarding their future values.
An initial public offering is the first sale of shares on the stock market by a
formerly private company. It’s when a company “goes public.” But investing in an IPO
can be like playing a video game — you need to hit the right button at just the right
moment. Unfortunately for most of us, the right moment is before the actual IPO takes
place. A company’s founders and private equity investors have the chance to make
some of the biggest gains from an IPO. That’s because, within the first few minutes of
trading, a stock can spike by 20% to 50% — or more. That means, even if you placed a
buy order before the market opens, you’ll still be getting in at a higher price.
The five top-performing IPOs of 2016 gained between 99% and 193% by year’s
end, some in a matter of weeks or months. Those headlines can lure investors into
thinking an IPO is a sure-fire profit opportunity… until you consider that the worst-
performing IPO companies from 2016 lost between 52% and 85% of their value over the
same time period. (A stock’s price can drop for any number of reasons. I’ve written
about some of these causes — and how to profit from them. Therefore, getting in on an
IPO can be just too risky for most investors who can invest in a stock only after it goes
public. The company’s founders and early-in investors get the liquidity and huge gains,
and most of their wealth is less sensitive to these public market variations. After all, if
you bought a stock when it was valued at 5 cents, you are less sensitive to the
difference between $17 and $26.
Why it’s better to Wait
A better time to get into a stock can be a few weeks or even months after a
company has held its IPO. For example, Facebook’s (FB) initial public offering in 2012
was priced at $38 per share. But when trading started, the price went straight down.
 Six months later, investors who were “lucky” enough to get in at the offering price
had lost half of their money. It took 15 months for the share price to recover. Not such a
hot investment… except for those who bought in after the IPO, when Facebook was
priced below $20 per share. Since this stock is now worth more than $140, investors
who timed it right have made seven times their money.
Taking a look at Snap, the company went public at a price of $17 per share, but it
opened at around $26. That’s when those early-in investors made millions. But then
Snap headed down and, as I write, is currently priced around $20.

Conclusion
With any stock investment, you need to understand the fundamentals of the
company’s business. An IPO adds the wild-card factors of the somewhat arbitrary
offering price, the volatility of the opening minutes of trading and the effects of those
first-day price changes. If you are a long-term investor and believe the company has
fundamental value — think Google (GOOGL), Amazon (AMZN) or Facebook — then the
early volatility and the risk of price drops are of less concern.
But for most of us, IPO investing is just too risky. Currently, there’s an added
challenge to IPO investing. Simply put, the IPO calendar is relatively empty. This has
resulted in investors and investment dollars chasing fewer opportunities, adding to the
volatility. More companies are choosing to be acquired by another company rather than
becoming an independent public company. Others, like Uber, are choosing to stay
private much longer than they could, partly due to the variety of investors they have
attracted.

Why Have an IPO?

Why go public, then? Going public raises a great deal of money for the company
in order for it to grow and expand. Private companies have many options to raise capital
– such as borrowing, finding additional private investors, or by being acquired by
another company. But, by far, the IPO option raises the largest sums of money for the
company and its early investors. Some of the largest IPO’s to date are:
 Alibaba Group (BABA) in 2014 raising $25 billion
 American Insurance Group (AIG) in 2006 raising $20.5 billion
 VISA (V) in 2008 raising $19.7 billion
 General Motors (GM) in 2010 raising $18.15 billion
 Facebook (FB) in 2012 raising $16.01 billion

Being publicly traded also opens many financial doors: Because of the increased
scrutiny from analysts and investors, public companies can usually enjoy better (i.e.
lower) interest rates when they issue debt. Moreover, as long as there is market
demand, a public company can issue more stock in a so-called secondary offering.
Thus, mergers and acquisitions are easier to arrange because stock can be issued as
part of the deal.
For investors, trading in the open markets means liquidity. If you are a
shareholder of a private company, it is very difficult to sell your shares, and even more
difficult to value your shares. A public company trades on a stock market, with ready
buyers and sellers and known price and transaction data. The stock market is therefore
referred to as the secondary market, since investors are buying and selling stock from
other public investors and not from the company itself. Public markets and liquidity also
makes it possible for a company to implement benefits like employee stock ownership
plans (ESOPs), which help to attract top talent.

Pros and Cons of an IPO

Pros:
 A large, diverse group of investors to raise capital
 Gives the company a lower cost of capital
 Increase the company’s exposure, prestige, and public image, which can help the
company’s sales and profits
 Public companies can attract and retain better management and skilled
employees through liquid equity participation (e.g. ESOPs)
 Facilitating acquisitions (potentially in return for shares of stock)
 Raises the largest amount of money for the company compared to other options
Cons:
 Company becomes required to disclose financial, accounting, tax, and other
business information
 Significant legal, accounting and marketing costs, many of which are ongoing
 Increased time, effort and attention required of management for reporting
 Risk that required funding will not be raised if the market does not accept the IPO
price, sending the stock price lower right after the offering
 Public dissemination of information which may be useful to competitors, suppliers
and customers
 Loss of control and stronger agency problems due to new shareholders, who
obtain voting rights and can effectively control company decisions via the board
of directors
 Increased risk of legal or regulatory issues, such as private securities class
action lawsuits and shareholder actions

An IPO, to recap, is when the company sells stock to the public. If a firm can
convince people to buy stock in the company, it can raise a lot of money. The IPO is
seen as an exit strategy for the company founders and early investors to profit from their
early risk taking in a new venture. Therefore, in an IPO many of the shares sold to the
public were previously owned by those founders and investors.
The stock market is referred to as the “secondary market,” since traders buy and
sell stock from other public investors, and not from the company itself. Only prior to the
IPO does the company issue stock directly to shareholders. This means that when you
buy shares of a company, you are not handing your investment money over to the
corporation, but instead to whomever sold you their shares. When a company sells
shares to the public, the company and its owners still typically retain a significant portion
of the total stock, so some early investors and co-founders may still have a great deal of
influence on the direction of the company despite there being a large number of new
shareholders.

Purchasing IPO Stock

Purchasing IPO stock depends on when in the process you buy it. In any case,
you must work through a registered stockbroker. If the company is not yet public, go to
its website and call the investor relations representative at the firm's contact number.
Inquire if shares are for sale in a private offering and at what price. If possible, the
representative will direct you to the firm's broker dealer to complete the sale by wiring
funds to the firm. They will then issue you stock certificates. If you want to purchase
stock at the IPO or afterward, register with a stockbroker and wire funds to your
brokerage account. When the IPO occurs, call your broker or go online, enter the stock
symbol of the company and purchase the amount of shares you want. The company will
issue you virtual certificates for the amount of shares you purchased.
Pre-market
IPO stock can be bought before or after the underwriting broker sets the opening
price. To buy the stock before the price is set, you must be a professional investor or
have a special relationship with management. However, these investments are
generally in very large amounts in the millions of dollars. They are also more risky than
a stock market investment because the shares are much more difficult to sell before the
IPO.
IPO Price
The IPO price is the official price that the investment bank underwriting the deal
will use to sell to the large institutional investors for the first trade of the stock. However,
individuals also have the opportunity to purchase at the IPO price under special
conditions. In particular, if you have a stock trading account at the same bank that is
underwriting the IPO. For example, Morgan Stanley was the lead underwriter of the
Facebook IPO in its 2012 debut. It allowed some of its clients to purchase at the $38 per
share opening trade. Unfortunately, many of those investors lost money as the stock
dipped precipitously in the months following the IPO.
Post-market
After the IPO stock has begun trading, it can be bought or sold just as any other
stock. In fact, on the first day of trading it is often easier to buy the stock due to the high
number of shares bought and sold (or liquidity). For example, during Facebook's IPO in
2012 more than 80 million shares were bought and sold in the first 30 seconds through
high-speed computer trading. Any investor with access to a stockbroker or trading
account can purchase shares on the open market for the rest of the day.
Stock Pop
The big attraction of an IPO is that it will have a major pop on the first day of
trading. In 2011, the shares of LinkedIn rose 109 percent from $45 to $94.25 on the first
day. IPO investors hope to achieve these massive gains on the first day of trading as
the public market truly validates the company's worth. During the Internet bubble of the
late 1990s, huge IPO gains occurred regularly.

There are five (5) factors to be considered in investing in IPO:

1. Objective Research Is a Scarce Commodity
Getting information on companies set to go public is tough. Unlike most publicly
traded companies, private companies do not usually have swarms of analysts covering
them, attempting to uncover possible cracks in their corporate armor. Remember that
although most companies try to fully disclose all information in their prospectus, it is still
written by them and not by an unbiased third party.
Search the Internet for information on the company and its competitors,
financing, past press releases, as well as overall industry health. Even though info may
be scarce, learning as much as you can about the company is a crucial step in making a
wise investment. On the other hand, your research may lead to the discovery that a
company's prospects are being overblown and that not acting on the investment
opportunity is the best idea.
2. Pick a Company with Strong Brokers
 Try to select a company that has a strong underwriter. We're not saying that the
big investment banks never bring duds public, but in general, quality brokerages bring
quality companies public. Exercise more caution when selecting smaller brokerages,
because they may be willing to underwrite any company. For example, based on its
reputation, Goldman Sachs (GS
) can afford to be a lot pickier about the companies it underwrites than John Q's
Investment House (a fictional underwriter).
However, one positive of smaller brokers is that, because of their smaller client
base, they make it easier for the individual investor to purchase pre-IPO shares
(although this may also raise a red flag as we touch on below). Be aware that most
large brokerage firms will not allow your first investment to be an IPO. The only
individual investors who get in on IPOs are long-standing, established (and often high-
net-worth) customers.
3. Always Read the Prospectus
We've mentioned not to put all your faith in it, but you should never skip reading
the prospectus. It may be a dry read, but the prospectus lays out the company's risks
and opportunities, along with the proposed uses for the money raised by the IPO.
For example, if the money is going to repay loans, or buy the equity from
founders or private investors, then look out! It is a bad sign if the company cannot afford
to repay its loans without issuing stock. Money that is going towards research,
marketing or expanding into new markets paints a better picture.
Most companies have learned that over-promising and under-delivering are
mistakes often made by those vying for marketplace success. Therefore, one of the
biggest things to be on the lookout for while reading a prospectus is an overly optimistic
future earnings outlook; this means reading the projected accounting figures carefully.
You can always request the prospectus from the broker bringing the company
public.
4. Be Cautious
Skepticism is a positive attribute to cultivate in the IPO market. As we mentioned
earlier, there is always a lot of uncertainty surrounding IPOs, mainly because of the lack
of available information. Therefore, you should always approach an IPO with caution.
 If your broker recommends an IPO, you should exercise increased caution. This
is a clear indication that most institutions and money managers have graciously passed
on the underwriter's attempts to sell them stock. In this situation, individual investors are
likely getting the bottom feed, the leftovers that the "big money" didn't want. If your
broker is strongly pitching shares, there is probably a reason behind the high number of
these available stocks.
This brings up an important point: even if you find a company going public that
you deem to be a worthwhile investment, it's possible you won't be able to get shares.
Brokers have a habit of saving their IPO allocations for favored clients, so unless you
are a high roller, chances are good that you won't be able to get in.
5. Consider Waiting for the Lock-Up Period to End
The lock-up period is a legally binding contract (three to 24 months) between the
underwriters and insiders of the company prohibiting them from selling any shares of
stock for a specified period.
Take, for example, Jim Cramer, known from TheStreet (formerly, TheStreet.com)
and the CNBC program "Mad Money." At the height of TheStreet.com's stock price, his
paper worth (of TheStreet.com stock alone) was in the dozens upon dozens of millions
of dollars. However, Cramer, being a savvy Wall Street vet, knew the stock was way
overpriced and would soon come down to earth, along with his personal wealth.
Because this happened during the lock-up period, even if Cramer had wanted to sell he
was legally forbidden to do so. When lock-ups expire, the previously restricted parties
are permitted to sell their stock.
The point here is that waiting until insiders are free to sell their shares is not a
bad strategy, because if they continue to hold stock once the lock-up period has
expired, it may be an indication that the company has a bright and sustainable future.
During the lock-up period, there is no way to tell whether insiders would in fact be happy
to take the spot price of the stock or not.
Let the market take its course before you take the plunge. A good company is
still going to be a good company, and a worthy investment, even after the lock-up period
expires.
The Bottom Line
By no means are we suggesting that all IPOs should be avoided: some investors
who have bought stock at the IPO price have been rewarded handsomely by the
companies in question. Every month successful companies go public, but it is difficult to
sift through the riffraff and find the investments with the most potential. Just keep in
mind that when it comes to dealing with the IPO market, a skeptical and informed
investor is likely to perform much better than one who is not.
Buying a stock at an IPO price does not mean that you are buying it at the
bottom. It is simply priced according to how much the market is willing to pay based on
surveys done among investors by the underwriter. Some IPOs may be perceived to be
relatively cheap based on growth prospects while others may be seen as expensive.
Until the IPO is finally traded on the stock exchange, you will never know where the
stock is going. In managing IPO, there are five tips from experts that may be
considered:

1. Losing the opportunity to take profits

IPOs can be unpredictable in the first few days of trading. Plan your selling
strategy. You can lock in your profits once you have achieved your target returns shortly
after listing day. Unless you really believe in the IPO stock for long-term investment,
take the chance to cash in on your gains whenever the opportunity presents itself. You
can always decide to buy it back later when you are more comfortable with the trend of
the stock.
2. Chasing IPO stocks on the first trading day
If you believe in the potential of the IPO and you want to buy more shares of the
stock, it is best that you wait for few more days for the stock to settle down before you
begin to accumulate. IPOs historically trade higher than their offering price upon listing,
but all succumb to profit-taking after a few days. Most IPOs recover after the first
correction which should give you a chance to profit on a stock rally.
3. Following hypes, publicity
When a company is going public, underwriters want to make sure that the IPO is
going to be successful no matter how unattractive the investment offer. Expect IPOs to
be heavily promoted by underwriters because it is their job to sell them to the investing
public. Avoid buying an IPO just because your broker recommended this to you or you
heard from your friend that the stock is many times oversubscribed.
4. Investing on brand recall
IPOs with familiar brand names are not necessarily good investments. Although
a strong brand recall definitely helps in promoting the IPO, there is no guarantee that
the stock will do well once it gets listed. Every IPO has a different story to tell. There are
IPOs with good brand names but no solid financials to show. For example, the company
may be heavily indebted or operating margins may be below industry average. Make
sure that before you invest in IPOs, you first read the investment prospectus. Find out
what the business model of the company is all about. What is the earnings track record
of the company and how will earnings grow further after the IPO? How will the proceeds
of IPO help the company expand and monetize its brand?
5. Investing with no stop-loss plan
Every now and then, there will always be a chance that you may invest in the
wrong IPO stock. When this happens, be prepared to cut your losses. Avoid getting so
emotionally involved with the promise of an IPO that you forget to control your risks.
Managing your risk is more than investing in the right IPO stocks. It is also about
controlling your losses. There are IPOs that steadily decline for months after peaking on
listing day. Some simply trade sideways forever with fading volume turnover. It pays to
plan your stop-loss strategy early on to protect your investments.
So what is ICO (Initial Coin Offering)?
An initial coin offering is similar in concept to an initial public offering (IPO), both
a process in which companies raise capital, while an ICO is an investment that gives the
investor a cryptocoin, more commonly known as a coin or a token in return for
investment, which is quite different to the issuance of securities as is the case in an IPO
investment.

TERMS
What is a Blockchain?
A blockchain is an incorruptible digital ledger of economic transactions that can
be programmed to record, not just financial transactions, but anything of value. It’s
essentially a digital spreadsheet that is duplicated across a network of computers. The
network is designed to update the spreadsheets on a regular basis. As the information
is shared and regularly updated and not stored in a single location, it’s considered to be
truly public and easily reconciled.
What are Tokens?
Tokens are coins that are offered during an ICO and would be considered an
equivalent to shares purchased in an IPO and are also referred to as cryptocoins.
What are Cryptocurrencies?
Cryptocurrencies are a digital or virtual currency that uses cryptography for
security. It is not issued by any central authority, such as a central bank, taking it out of
the reach of governments who can interfere or manipulate. The transactions are
anonymous in nature. Tokens issued from an ICO will have a value, with the ICO
allocating equivalent to equity to the token, which gives the investor ownership with
voting rights and, in certain cases, qualifying for dividends.
While this will be the closest format of an ICO to IPOs, the vast majority of ICOs
issue tokens that are an asset giving investors access to the features of a particular
project rather than ownership of the company itself. It’s ultimately the process of
crowdfunding a new cryptocurrency project, involving a token sale, with the
cryptocurrency project raising capital to fund operations, with investors receiving an
allocation of the project’s tokens in return. ICOs tend to be open from between a few
weeks to a month, though some have been open for longer and fund raising for a
particular ICO possibly taking place on multiple occasions, unlike an IPO which is a
onetime event.

Some key characteristics of an ICO include:

 Participation in a project, Decentralized Autonomous Organization (DAO)
or an economy.
 Coin ICOs generally sell participation in an economy, while token ICOs
sell a right of ownership or royalties to a project or DAO.
 Owning tokens do not always give the investor a right to vote on the
direction of a project or DAO, with the rights of the investor embedded within the
structure of the ICO, though generally the investor will have input throughout a project
lifespan.
 The majority of ICOs involve the creation of a defined number of coins or
tokens prior to sale.
 ICO prices are usually established by the creators of the economy, project
or DAO.
 ICOs may have multiple rounds of fund raising, with coins or tokens on
offer, increasing in value until the release date, with early investors likely to have greater
rewards embedded within their tokens as an incentive.
 ICOs conclude once the coins or tokens are tradable in the open market.

If we were to compare the key features of ICOs and IPOs, some of the similarities
and differences would be as follows:
 An IPO gives you ownership of the company based on the number of
shares acquired, whilst an ICO may only give you rights of a particular project, not the
company launching the project.
 Decision making in IPO companies are centralized with the CEO and the
board involved in the day to day running of the business, whilst with ICO
companies/projects, decision making is decentralized, giving the investor a material
decision making position.
 Financial data is released as per the rules of the exchange on which the
IPO took place, whilst for ICOs, these will either be public by way of the blockchain or
as outlined within the white paper and agreement with the investors.
 Companies launched by way of an IPO must pay taxes, with investors
having to pay capital gains tax, whilst for ICOs, the company may not be subject to
direct tax, only the investor being required to pay capital gains tax.
 An IPO is a onetime sale with multiple intermediaries involved in the
process of determining the conditions, pricing, etc., whilst ICOs can have multiple
rounds of fund raising, with few if any intermediaries, the white paper the blueprint.
 And finally, stock exchanges and companies listed by IPO are heavily
regulated, whilst the exchanges on which ICOs are launched are quite the opposite.
For companies raising capital through ICOs, the advantages include:
 The project, DAO or economy is not necessarily subject to direct taxation,
which in contrast to companies fund raising through IPOs.
 Sales of coins or tokens are direct, including multiple rounds, with few if
any intermediaries required in the process, investors basing investment decisions on
the content of white papers prepared by the fund raising entity.

While ICOs are to mainly raise capital for a start up, they are also used to kick-
start the sale of a service to be taken to market or the use of a new cryptocurrency. On
most occasions, the investor becomes the consumer of the service being offered by the
company raising funds through an ICO, which allows investors to buy coins at a
discount, though valuation will ultimately be dictated by supply and demand once
released to market.
In vetting ICOs, there is no guarantee or sure fire way of distinguishing the good
from the bad, investors needing to avoid scammers who are using ICOs to dupe
investors out of funds. There’s plenty of interest at present from an investor perspective,
attributed to sizeable returns that investors have enjoyed to date, demand driving
prices, with large prices gains incentivising investors to lock in profits, which can lead to
mass sell-offs that could ultimately wipe out investor money, not to mention the
company.

History and Evolution of ICO

The first ICO was by Mastercoin back in 2013, which raised approximately US
$600,000 for a project to create a Bitcoin exchange and platform for transactions, while
Bitcoin led the way on Cryptocurrencies, becoming the first decentralized
cryptocurrency back in 2009, other cryptocurrencies sometime referred to as Altcoins,
essentially Bitcoin alternatives have hit the market.
The shift in focus away from the use of venture capitalists for fund raising has
taken the market by storm and the numbers of ICOs continue to rise, with the liquidity
associated with ICOs over VC funding driving investors into a frenzy. Venture
Capitalists have begun to take notice however and are looking for a way back into the
segment, with Blockchain Capital having run its 3rd fund raising in what was to be the
first liquidity enhanced venture capital fund, the VC taking out the incubation period for
investors.
Unlike centralized electronic money / banking systems, cryptocurrencies are
decentralized. Bitcoin and the early altcoins were launched without an ICO and with the
market still considered relatively nascent, governments and central banks have been
relatively slow in catching on to provide some formal legal framework to the
cryptocurrencies and the ICOs that followed.
With VCs getting in on the act in fear of losing out on major fund raisings, news
also hit the wires in April of this year of the first ever underwriter of initial coin offerings.
First Bitcoin Capital sees itself as a gatekeeper and by acting as the underwriter, assists
in separating the good with the bad in the interest of longevity within the segment, by
way of sound due diligence on the underwritten ICOs.
As of today, there’s still a long way to go for the market and until there is a more
robust framework, which is recognized by governments and regulators, investors can be
left out in the cold with the lack of a legal framework for those who have been duped.
Even Madoff’s Ponzi scheme, which lost investors billions, is returning some funds back
to the investors, in the case of ICOs there’s no legal entity to which the investor can
face off, let alone make claim to.
In terms of the numbers, ICOs have raised US$327m to date through fund
raising, compared with US$295m raised by venture capitalists representing blockchain
startups, VCs falling behind this year for the first time as the numbers of ICOs continue
to increase.
Since the Mastercoin’s ICO, it was estimated that ICOs raised a lowly US$25m in
2014, falling to US$10m in 2015 following Bitcoin’s price collapse of 2014. In 2016, the
trend reversed, with ICOs raising an estimated US$225m, supported by a rally in the
price of Bitcoin, which drove interest into both blockchains and Fintech.
While there have been plenty of success stories, in the 2 nd quarter of last year,
an Ethereum based project named The DAO entered an ICO to launch an investment
fund without a fund manager, with the investors being involved in all of the investment
decisions upon launch. The ICO raised almost US$150m, almost 70% of 2016’s total
capital raised through ICOs. By mid-2016, hackers managed to get away with more
than US$40m from the DAO, bringing the project to a grinding halt and the value of
Ether down with it, Ether’s price falling from US$19 to under $12 in just a matter of
days. In the interest of market capitalizations and protecting the investors, Ethereum
created a new blockchain and ultimately reversed the theft, leaving the original
Ethereum blockchain, now known as Ethereum Classic behind, a small minority
continuing to support and assign value to the old blockchain.
Despite the inherent risks, which are not just down to hacking, but also fraudsters
and scammers, 2017 looks to be another stellar year, with ICOs raising in excess of
$150m by mid-May of this year, based on numbers from Smith + Crown.
Concepts are getting more and more innovative and the speed with which capital
is raised is getting faster by the day and, without the regulatory oversight things could
burst before the likes of the SEC catch up.

How Does ICO Work and How to use ICO

Startups kick start the ICO process by establishing the blockchain and set up of
protocols and rules, at which point an ICO data is announced.
For the creator, the next step is to begin mining for coins that will sold during the
ICO, with social media sites, Reddit and a rising number of cryptocurrency related
website used as a marketing medium to attract investors ahead of the ICO data,
creators looking to draw in as much interest as possible to not only raise the required
funding, but also push demand and prices post ICO.
In the background, the creators will make their final checks and adjustments to
ensure its smooth sailing by the time of the ICO.
For the cryptocurrency creators, they will need to join an exchange, the
exchange similar to that of a stock exchange during an IPO, with investors needing to
have an account with the exchange to be able to buy the new cryptocurrency with other
cryptocurrencies or fiat money.
Active and up and coming ICOs can be found through various sites, with the
purchase of cryptocurrencies being made through the selected exchange, with investors
also able to buy directly through the creators official website.
 Exchanges that are widely recommended for the purchase of new coins
include Bittrex, Kraken, Poloniex, Livecoin, SpaceBTC, Bitlish, though there are many
others.
Documentation requirements vary depending upon the investor domicile, with the
requirements outlined on the respective exchange’s site and creator website.

A step by step of an ICO can be summarized as follows:

Pre-Announcement: This is the marketing stage of a future project through sites
frequented by cryptocurrency investors, with the creators of the project preparing a
white paper, essentially an investor presentation outlining the details of the project.
Once the white paper has been circulated, the company will get a sense of whether
there is investor interest in the project proposed, with the company then addressing
concerns and addressing risks raised by would be investors to reach a final business
model and a final version of the white paper.
Offering: This is the final version of the white paper, setting out the terms of a
contract for the benefit of the investors, made on behalf of the company entering into
the ICO. The offer will outline the project details, the total amount of capital required,
together with project timelines. It will also indicate the financial instrument to be sold
during the ICO, normally tokens. The financial instrument will have a value assigned to
it, together with the rights of the investor along with the expected period after which the
company will commence returning earnings to investors, traditionally by way of
dividends.
Once the offer has been signed, the ICO start date is announced and the
marketing campaign moves into overdrive. Marketing Campaign: This is a pivotal
component of the ICO, with the marketing campaign key to the company being able to
raise the necessary capital. Companies are generally nascent and unknown, bringing
marketing agencies into the frame to make the necessary presentations, etc. The
campaign will tend to last up to a month on average, target audience being institutional
and some smaller investors. Participants of crowdfunding programs tend to be the main
segment, investors generally more willing to back projects, with their involvement in the
project considered a positive for both the investor and the company. Once the
marketing campaign comes to an end, the buying and selling of tokens commences,
with the company having established an exchange for investors to acquire tokens.

The ICO: Companies generally release tokens on blockchain in two ways:

 Collect the specific capital, outlined within the offer, and then divide and
distribute the tokens to the investors based on initial investment made.
 Alternatively, tokens are sold on cryptocurrency exchanges, which means
that the tokens need to be released on a number of exchanges in advance for trading.

Once the sale has ended, the company commences on its obligations. For the
investor, it’s a case of exploring the various exchanges or social media sites that publish
active and up and coming ICOs and then opening an account, acquiring the tokens,
having completed the necessary due diligence on the company or project in question.

The New Way of Tech Companies to Raise Money

Startup companies are generally some form of an entrepreneurial venture, which
will take the form of a new, rapidly expanding business targeting the needs of a
marketplace by way of innovative products, processes and services.
While historically, startups would have raised capital through venture capitalists,
the advancement of fund raising through ICOs has been almost spectacular. While
venture capitalists tie up investor money for lengthy periods of time that can extend to
years, ICO money is far more liquid and with value easily assigned, traded within a very
short period of time. The liquidity associated with ICOs is certainly a contributory factor
to the increasing number of ICOs, with the lack of cumbersome documentation and
unjustified demands and requirements of the VC also avoided.
Adding to the upside for startups is the involvement of the investor in the decision
making process, whether it is an actual business or a project, providing the investor a
say, many of the initial investors in startups being entrepreneurs and experts in their
respective fields.
Blockchain technology and cryptocurrencies have certainly paved away for the
more innovation, with the lack of regulatory oversight allowing startups to push the
boundaries created by those before them.
 Successes from ICOs are well publicised, with some of the most well-known
ICOs including, but certainly not limited to:
 Ethereum (ETHER-ETH): US$18.5m raised in capital. At ICO investors
paid US$0.4 per Ether back in 2014. The value of an Ether hit a high of US$14 per
Ether in 2016. Ether is certainly one of the more well-known early success stories. Year-
to-date, Ether’s market cap has surged in excess of 500%.
 ICONOMI (ICN): US$9.1m in capital raised.
 Maidsafe Coin (MAID): US$7m raised in just 5-hours, which had been the
record for the most amount of capital raised in the shortest period of time.
 Golem Project: The Company’s goal is to build a P2P global computer
network, with blockchain data handling payments in GNT tokens. US$8.6m in capital
raised in just a matter of hours.

To be honest, these ICOs pale into insignificance by today’s standards, Bancor

Foundation raising a whopping US$153m of Ether through the sale of its tokens in just 3
hours in mid-June. Post ICO, there is some great returns for investors that continue to
grab the headlines, Ether not alone. Ripple’s XRP springs to mind, up 10x to dwarf
Bitcoin’s 150% year-to-date return.

Ripples XRP Price Rise

If there were any doubts of Ripple, 10 financial institutions signing up to send real
time payments internationally was certainly a plus for the creators and angel investors,
with banks including Bank of America and Royal Bank of Canada signing on.
And in May, there were more than 80 companies including Toyota and Merck
joining a group called the Enterprise Ethereum Alliance (EEA) to create standards for
smart contracts, large corporations taking the initiative to bring some order to the
market.

How to Join Initial Coin Offering?

There are a number of sites that list current and up and coming initial coin
offerings including Reddit, Cyber Fund and even social media sites such as Facebook.
To invest, the first step of the process is to identify which project or company launch is
of most interest and while searching through the ever increasing number of ICOs hitting
the worldwide web, set up a cryptocurrency wallet.
With a lack of formal structure, each ICO will likely have a different set of
requirements, though ultimately it’s a simple process of sending tokens upon payment
by cryptocurrency to the blockchain identified and listed on the ICO website, which will
also provide the investor a step-by-step guide into the investment process.
Public sites, such as Blockchainhub, advise that before investing it is important
not to use any kind of an online wallet or exchange. Backers are generally required to
export their private keys into another wallet in order to access their new coins, so it is
vital to ensure that the wallet’s private keys are exportable.
Companies have looked to facilitate the process by making available functioning
online wallets for their ICOs, where the investor can send the money directly to the
wallet established, the funds exchanged for tokens using the exchange rate at the time
of purchase, with the tokens deposited into the wallet. Others remit the purchased
tokens to the address from which the funds were sent.
Investors will also need to be aware that certain wallets may be incompatible with
the tokens and are therefore not visible following purchase and receipt. For this reason
it’s essential to have a wallet which permits the export of private keys, so that it is
permissible to transfer the tokens to a new compatible wallet.
It’s become far simpler since the launch of Ethereum, with creators setting up
user-friendly campaigns, with Ethereum’s wallet supporting multiple tokens, making
access to purchase tokens far easier than before.
Outside of identifying the ICO itself, due diligence is also recommended in the
interest of avoiding scams and Ponzi schemes, with ICORating providing would be
investors with a full assessment of the project or company in question and other
companies providing some additional background should more details be needed.
The Gold Rush Go Through Regulation

While cryptocurrencies have seen advancements in the regulatory landscape

with countries such as Japan and Russia recognizing cryptocurrencies as legal tender,
ICOs have yet to fall under the cloak of regulators.
The SEC has publicly announced that ICOs need to protect the investor and, with
the size of the market, has certainly caught their attention, with certain regulators and
governments now having caught up on blockchains and the likes of Bitcoin and Ether.
Regulators have a responsibility to even the most foolhardy investor and in the
interests of avoiding another Dot.Com bubble eruption, some oversight would certainly
save a lot of pain down the road, particularly should fraudulent cases begin to rise
alongside the ever increasing number of ICOs.
While the SEC is looking into the latest fund raising FAD, it has also come out
and announced that they will begin to focus in ICOs should they become a significant
component of the market for investments and a triggering event takes place, with
companies looking to raise capital by way of ICOs becoming subject to both regulatory
and enforcement action.
The lack of transparency remains an issue and there have also been reports that
the sale of tokens to U.S citizens is in fact deemed illegal, though whether exemptions
will be permitted remains to be seen, uncertainty certainly there for investors consider
down the road.
In the end, it is hard to imagine regulators sitting on the side lines when
considering cryptocurrency valuations, the rising number of ICOs and the inherent risks
associated with investing in start ups in this manner and how both investors and the
companies respond to the magnifying glass of regulators will likely decide the fate of
ICOs, which for now are able to raise sizeable sums as a result of the inflated valuation
of cryptocurrencies such as Bitcoin and Ether.
 One thing is certain, legal recourse to start ups with enforcement agencies able
to take action against scammers and fraudsters would be a great start, the less savvy
investor certainly there for the taking by the few who are so inclined.

ICO or Not?
Investors will be wowed by the returns and the surge in market cap of
cryptocurrencies over the last year and, while there are certainly some tremendous
opportunities and sound investment opportunities to be had, there are risks that need to
be considered before entering the blockchain world.
So, as is always with the case with any investment and never more so than those
that can give investors returns in excess of 100% in a matter of months, there are pros
and cons for the investor to consider.
Starting with the positives
 Despite the number of ICOs hitting the market, as many as a 100 every
few weeks, there have been a large number of companies that have become incredibly
successful, having raised capital through ICOs.
 The high ROI (Return on Investment) story certainly provides an
opportunity for the yield hungry, though where returns are on the higher side, there is a
higher level of risk associated with investing.
 Perhaps the greatest feature of an ICO is that the tokens are considered
liquid, unlike investing in traditional start ups, where investor money can be tied in for
years. ICO investors can cash in and out at any time, converting ICO tokens into Bitcoin
or other cryptocurrencies with ease, assuming the demand is there.
 There are also no fees similar to those that investors face with IPOs and
then there are VCs, who like to run the show and make unnecessary demands, which
could devalue the investment on occasion, companies losing their identity in search of
the Dollar.

Where there are positives, there are also negatives to consider and some of the
more negative elements to investing in an ICO include:
  Well-known for failures, with too many projects being alike or with projects
failing to reach expected levels, driving the value of initial coins to zero.
 A lack of governance can lead investors down the garden path, with a lack
of appropriate due diligence leaving investors open to Ponzi schemes and more.
 While the upside can be sizeable, it’s ultimately not something to bet your
shirt on and any investments lost as a result of scams and frauds are unlikely to be
recovered.

With the lack of regulatory oversight, investors do need to do a decent amount of

due diligence and repeating this view is reflective of the need, with the number of
fraudulent ICOs likely to be on the rise as regulators lag behind the segment.
Due diligence tends to be expensive and when it comes to cryptocurrency
economies and ICOs, the market is beginning to see the presence of rating agencies,
who conduct the due diligence, carrying out the necessary analysis of the information at
hand, with the rating agencies publishing their research reducing some of the risks
associated with investing in ICOs, self-policing coming in ahead of any more formal
regulatory oversight.
ICORating is one of the agencies undertaking the task of providing some cover
for investors and the analysis will certainly be a starting point to drive the ICO market to
the next level, though even rating agencies have been known to get it wrong from time
to time.
On top of the ratings, investors can also look out for ICOs that include
independent escrow agents, so that the capital raised does not reach the company
entering an ICO, but a 3rd party.
Multi-Sig is an example of such an escrow agent, with the agent essentially
funding the project on an ongoing basis, funds released from an escrow as needed, the
agent ensuring that project targets are being met along with the company’s pre-
determined obligations to the investor.
So, while some level of control is entering the market, the question remains on
whether this is another dot.com. The skeptics have been out in force since the Global
Financial Crisis, with every investment opportunity being labelled as economic bubble,
included Bitcoin.
 The similarity is the fact that its digital and more importantly, lacking of physicality
and investors don’t have to think too far back, when companies were selling concepts
for millions of Dollars.
For now, ICO fund raising falls well short of the levels seen during dot.com era,
which should provide some level of comfort, the only concern being a collapse in the
market should the volume of fraudsters surge over the near-term, or there be a collapse
in the valuation of cryptocurrencies.
The association is ultimately coming off the back of the surge in valuations and
market cap of the sector, but the surge in market cap is not isolated to blockchains and
startups hitting the market looking to take advantage of the yield hungry investor, so
calling a bubble for now are certainly a more pessimistic view point. You only need to go
back to the early days of tech stocks such as Intel, Apple, Microsoft and Alphabet to
consider how the industry can be reshaped in the years ahead.
Regulatory oversight of some sort will certainly provide it will longevity, though the
attractiveness of ICOs could be lost should the minimum requirements become as
intensive, such an outcome not killing off the industry, but just the medium through
which capital is raised. It’s pretty easy for creators right now…
For now it’s a phenomenon, but tomorrow it could be yet another cautionary tale,
joining the dot.com and MBS (Mortgage backed security) stories of yesteryear. It will
boil down to the integrity of the sector and the success of companies raising capital,
mindful that not all will deliver, but at least a majority.
The numbers certainly point to a bubble, with ICOs in the 2 nd quarter of this year
each raising in excess of US$10 in a single day and the sizes are rising as investors
look to cash in on the trend before the bubble bursts. If you can get in and get out with
your tidy profit before doomsday, then it’s the investment for you, but as with any
bubble, few can predict the day of the crash.
Investors are throwing money ICOs and in certain cases, the business models or
scope of projects are shady at best, but with cryptocurrency valuations on the rise, the
investment may be justified, a crash in the value of Ether or Bitcoin could be a different
story altogether, such an event not a completely farfetched consideration for investors
looking to convert relatively stable currencies into tokens, the success of the business
itself not the only consideration, the value and stability of the cryptocurrency also
needing to be considered.
Does that sound like the Dot.Com bubble, where valuations grew exponentially,
with the NASDAQ surging from under 1,000 to over 5,000? How did it happen? Cheap
money, market over confidence and investors on the hunt for the next big thing after
mortgage backed securities… Current surges in post ICO valuations are certainly not
based on anything tangible, with projects or businesses in their early stages, so 10x
increases in a matter of months sounds somewhat extreme, the appetite for
cryptocurrencies perhaps masking the business or project the coins are actually
investing into… When you consider the regulatory oversight of the NASDAQ, that’s
quite a run and quite a fall from grace. The gains in Bitcoin alone have been striking,
bringing new investors into the market, but how long before the wool is pulled from the
eyes and the smart money walks out door leaving the last person to turn out the lights.
These things tend to end in tears after all…

5 Things to check before investing

 Legal Status of ICOs
The first and foremost priority for the investors should be to check and consider
the legal status of the cryptocurrencies, crypto-tokens, ICOs, investment in ICOs etc in
their respective countries/regions.
For example, China and South Korea have banned ICOs. Only fewer countries
have issued preliminary guidelines for the ICOs or are in the process of regulating ICOs.
Most of the countries have adopted a cautious approach towards ICOs.
 Purpose of the project
It is very important for the investors to learn and be aware of the project(s) which
are going to be funded with their ICO investments. This involves careful study and
analysis of the ICO whitepaper which is created and published by business entities
intending to raise funds through ICOs. The accessibility, transparency, authenticity, and
credibility of the ICO whitepaper in question and the information contained in it are of
paramount importance. This knowledge and awareness could prove to be immensely
helpful for the investors to remain vigil and guard themselves against falling prey to
scams.
 Background check
Interested investors must conduct a thorough background check of the business
entity making an ICO. This may include information (pertaining to the business entity and
the project) such as the registered office, project location(s), areas of operation, core
operations and sources of revenue, financial reports, regulatory licensing, industry
accreditations, financial and credit ratings, history and past performances, ongoing and
future projects, technological resources available, media and public relations etc.
Investors may use other parameters as considered necessary by them. Again, the
accessibility, transparency, authenticity, and credibility of this information are a crucial
factor.
 Core Team
While considering an ICO investment, investors should know into whose hands
they are entrusting their investment. Who are the people, the owners, the business
leaders, the team and the management body behind a business entity or a project?
Relevant education, experience, skills, expertise and competencies of the core team is
vital to the success of a project or for the overall success of a business venture.
 Digital security
Blockchain technology has emerged as a powerful platform for decentralized and
distributed digital record management with enhanced digital security. One of the most
apparent applications of blockchain technology has been in the field of digital currencies.
The risk exposure to cyber threats like DDoS, data manipulation, and data and identity
theft mitigates in the blockchain platform.
Investors should also look out for the SSL certificate of the company’s website
when they happen to visit the same. Green activated padlock in the left side of the
address bar on the browser window indicates that the browser connection to the server
is secure.
Investors can also check in whose name the SSL certificate was issued. In short,
SSL certificates bind a domain name, server name or hostname with an institutional
identity (e.g. company name and location).