What is ICO?
An Initial Coin Offering, also commonly referred to as an ICO,
is a fundraising mechanism in which new projects sell their underlying crypto
tokens in exchange for bitcoin and ether. It's somewhat similar to an Initial
Public Offering (IPO) in which investors purchase shares of a company.
When a cryptocurrency startup firm wants to raise money through
an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper
which states what the project is about, what need(s) the project will fulfill
upon completion, how much money is needed to undertake the venture, how much of
the virtual tokens the pioneers of the project will keep for themselves, what
type of money is accepted, and how long the ICO campaign will run for. During
the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some
of the distributed cryptocoins with fiat or virtual currency. These coins are
referred to as tokens and are similar to shares of a company sold to investors
in an Initial Public Offering (IPO) transaction. If the money raised does not
meet the minimum funds required by the firm, the money is returned to the
backers and the ICO is deemed to be unsuccessful. If the funds requirements are
met within the specified timeframe, the money raised is used to either initiate
the new scheme or to complete it.
Legality?
Legally, ICOs have existed in an extremely gray
area because arguments can be made both for and against the fact that they're
just new, unregulated financial assets. In some cases, the token is simply a
utility token, meaning it gives the owner access to a specific protocol or
network; thus it may not be classified as a financial security. On the other
hand, if the token is an equity token, meaning that it's only purpose is to
appreciate in value, then it looks a lot more like a security.
Source: Nasdaq, Investopedia, BitcoinMagazine
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