Short for Initial Coin Offering, an ICO is a type of crowdfunding, or crowdsale, using cryptocurrencies as a means of raising capital for early-stage companies.
It is widely seen as the cryptocurrency world’s answer to initial public offerings (IPOs) — and they were especially popular during the crypto bubble of 2017.
Since then, ICOs have come under fire amid concerns that they can be used by scammers and market manipulators. Some projects have also faced action from the U.S. Securities and Exchange Commission because they were deemed to be unregistered securities sales.
An ICO usually begins with a company launching a whitepaper detailing the project’s goals, how many tokens will be mined, and how they will be distributed. In some cases, investors will be given reduced prices if they purchase tokens early on in a campaign — and it can also be possible to receive discounts if cryptocurrencies are used for a purchase instead of fiat.
Tokens sold through an ICO may offer utility, meaning that the owner can exchange them for access to a certain product or service. In rare cases, they may represent an ownership stake in the start-up that launched the listing.
ICOs have hit headlines in recent years for being very risky investments, and some of them have even been identified as exit scams.
Research by the Review of Financial Studies shows ICOs raked almost $13 billion globally between January 2016 and August 2019. Meanwhile, a report by Ernst & Young found that 86% of leading ICOs that launched in 2017 were below their listing price by October 2018.
Key criticisms of ICOs revolve around the ease by which an ICO can be launched without regulatory oversight — meaning that they often draw in inexperienced investors. Owing to their image problem, initial exchange offerings and security token offerings have become much more popular alternatives in recent years.
The SEC has been known to take action against some projects — including Telegram, which was ordered to return a large sum of the $1.7 billion it raised for the Telegram Open Network back to investors.
In March 2020, under a preliminary injunction issued by the District Court for the Southern District Court of New York, Telegram had to return $1.2 billion to investors on top of a civil penalty worth $18.5 million.