Initial Coin Offering, or commonly known as ICO, is a form of crowdfunding or fund-raising activity based either on established cryptocurrencies such as Bitcoin (BTC) and Ether (ETH) or fiat currencies. Startups that are incorporating coins into their product’s design, are using ICO as a method for capital raising since it is easier and more efficient, bypassing in this way the rigorous, time-consuming and regulated processes required by venture capitalists and banks. An advantage of this method is that it allows a team to focus more on their product rather than marketing and pitching to investors, which usually takes a high percentage of time.
ICO campaigns extend over a period of a week or more, in which potential investors are allowed to purchase company’s coin (analogous to shares). During the campaign, investors buy the company’s coins and this purchase is executed as a form of smart-contract, that is equivalent to shares’ acquisition agreement. If the company does not raise the minimum funds required, the money should be returned to the backers, while if it is successful the money is transferred to the company for carrying on with product’s development. This is encoded and secured via a smart contract and the data should be publicly available for transparency.
As of May 2017, it is claimed that over than $380M have been invested into ICOs. It worths to mention that cryptocurrency ecosystem is experiencing a tremendous rise, with Bitcoin market capitalisation growing from $11B to $47B in one year. Many startups follow the ICO direction for fund raising by advertising mainly a whitepaper and a coin dependent on a small (initially) network of nodes running the underlying infrastructure of their Blockchain.