Need to Raise Capital Funding? Think ICO or ITO, Not IPO
Unlike the traditional methods of raising capital, an ITO is a progressive alternative capital-seeking and acquisition venture.
With global markets undergoing radical changes, many now believe that IPO (the Initial Public Offering) will soon be a thing of the past. The challenges experienced in traditional methods of capital funding, such as the expenses, inefficiencies, and barriers to entry have sparked a new shift to innovation and openness. This has led to the birth of something known as an ITO.
What is an ITO?
ITO stands for Initial Token Offering. It is also referred to as Initial Coin Offering (ICO). With this process, you can digitize or tokenize your asset and make it publicly available through the internet.
This means you can start a business, company or project with any asset value. Via ITO, you generate digital coins or tokens which represent your asset. Consecutively, you can electronically transfer these coins or tokens.
Just like with crowdfunding, you can exchange or transfer your coins or tokens. The same way that stocks appear in a stock market, you can list them in an online exchange platform. This process is similar to an IPO, although it’s without limitations or hefty charges that usually apply to equity-based projects or assets.
The token is a representation of the physical asset or a part of the underlying project. As an issuer, you have the flexibility to configure it as an item with a face value although it can act as an asset on its own. That means it has its own privileges, like dividends, voting rights, and capital appreciation.
In addition, the tokens can act as a medium of exchange. They can be used to directly redeem goods or services from an involved merchant.
Among the most luring aspects of tokens to upcoming investors is that their owners can transfer them on the secondary market without the involvement of a third party. In other terms, you don’t have to use a centralized agency when settling the transactions.
It is important to note that the traditional currency for cryptocurrencies is known as crypto-investing. Not until the other day, ITOs focused on investments through crypto coins, like ethers or bitcoin. However, investors can now virtually trade anything, crypto coins included, and also with any asset that can be digitized and quantified.
Parties Involved in ITO
Only two parties are involved in the ITO process: the issuing body and the exchange platform.
The Issuing body represents the company conducting the ITO. It is the company charged with the responsibility of marking the ITO and offering information about it to prospective investors.
The exchange, also known as crypto-exchange, represents the company that provides a platform for buyers and sellers to trade the token in the secondary market. In certain instances, the exchange also offers two sub-functions:
- It acts as the underwriter whereby it assumes the responsibility of the whitepaper, or the official explanation of the technology and services that are on offer. It also gives the terms and conditions.
- It assumes the responsibility for the technologies involved in all ITOs processes, including client accounts and deposit addresses.
How ITOs Process Work
The company that wants to have an ITO advertizes their offer to potential investors, same as in a crowdfunded project. Prospective investors express their interest in the deal.
It is worth noting that every ITO has limited amount of time and number of tokens. Thus, the issuing body is in charge of allocating the correct proportion of equity or services for every investment within a specific timeframe.
Once the time elapses, the issuer should publish the results of the campaign and announce the exchange for trading the token. In turn, the exchange readies the token for listing.
The Listing Process
The listing process demands the token to be in a digital format to enable the buyers and seller to trade it in the same way they would purchase a share on an exchange. Previously, this token assumed the form of a colored coin, which acts as a fraction of a bitcoin representing the value of an asset. Currently, additional methods have come up, such as, Ethereum-denominated coins, also known as ERC20 tokens. The ERC20 standard gives room for programmable tokens that can respond to events and execute functions.
The exchange is also responsible for determining the listing price and creating a market for the token. In some cases, the exchange works as the market-maker by stabilizing price action while avoiding extreme price movements and fluctuations.
When the price movements become volatile, the token finds the ideal value where it stabilizes based on market demand and supply.
What makes ITOs Popular?
- It is a progressive alternative to the traditional capital funding method.
- It doesn’t encourage single investor in dominating the shareholder register where company policy can be influenced in one way.
- ITOs provide access to investors from all over the world.
- It is cost effective, encourages innovation and access to new or disruptive technologies.
- It promotes diverse products, services and companies.
- ITOs open the market to far-fetched e-commerce opportunities.
- Unlike IPOs which are cost-prohibitive, ITOs utilize cost-effective listing process.
Problems with the ICO Markets
Innovative investors are not ready to take chances and will treat projects as long-term ventures through thorough examination of founders’ experience and future prospective. With the rising barriers, improvement of projects’ quality will attract more institutional investors to the crypto industry. Most investors have embraced the low barriers of tokenization that are meant to make funding accessible. Although 2017 can be justifiably called “The Year of the ICO,” we must admit that something promising in the ICO market went totally wrong. Most investors eyed the promising and ambitious projects but only fell victims to scams and fraudsters who were after easy cash. This was mainly because the watchdogs were not extremely keen when dealing with fraudsters and scammers. We are hopeful that there will be creation of grounds for sustainable legal basis and a new life into the ICO market we expect to witness in 2018.
Author Bio: Nima Sheikholeslami MD. is a medical doctor and serial entrepreneur. He’s a vegetarian and an animal rights activist. He lives in Miami, Florida with his wife and two dogs. You can learn more about him here.