What is an ICO?

Within the world of cryptocurrencies and blockchain, the term “ICO” stands for Initial Coin Offering. It is among the key terms setting the trend of raising capital for a startup or project in this sphere. The meaning of ICO is a method of financing whereby companies issue their own tokens or coins in return for cryptocurrency-most often Ethereum or Bitcoin-or even fiat money. In this article, we will understand what an ICO is, how it works, and what risks and opportunities are associated with it.

How does an ICO work?

Why is the popularity of ICOs so high?

How to invest in an ICO?

In this respect, ICOs opened new horizons of financing blockchain and crypto projects, presenting both unparalleled opportunities and challenges for investors and developers alike. To this end, participation in an ICO should be based on full understanding of associated risks and benefits anticipated with due care and conscientious analysis of each proposed project.

ICO License for a Cryptographic Project

All this, together with the growing popularity of cryptocurrencies, gave birth to a new form of project financing-through initial coin offers, commonly referred to as ICOs. As the market developed, the need arose for regulation aimed at protecting investors and ensuring that legislation was adhered to. Because of this fact, many countries have started to introduce into their practice the licensing of ICOs for crypto projects. In this article, we look at what an ICO licence is, why it is needed and how to obtain one.

What is an ICO licence?

A license for an ICO is an official permit given by a regulatory body for legally conducting an initial coin offering by a company or project. Such a license adds to the legitimacy of the project and, at the same time, will increase confidence among potential investors by protection of their interest.

Why do you need a license?

Legal compliance: Most jurisdictions allow the performance of an ICO. Having a licence means that the project is operating within the law.

Protection of investors: Licensing itself means verification of the project on reliability and transparency, saving investors from fraud.

Reputation: Serious treatment and trust are attributed only to licensed projects, which can help to attract capital.

Process for obtaining a licence

Selection of jurisdiction: In the beginning, choose a country you would want to obtain your license in. The points of main focus will be upon the regulatory environment, tax policy, and generally favorable climate for crypto projects.

Documentation Package Preparation: A set of documents is to be prepared, which includes a business plan, project whitepaper, team information, and description of AML/CFT measures, among others.

Application Filing: The filing of the application with the regulator along with all the documents and paying the due amount of state duty.

Due diligence: The regulator has profoundly verified the application and the documents for their compliance with the law.

A license is obtained: The project, which has passed all the checks, receives a license for carrying out an ICO.

The main licensing requirements of an ICO are very different from one country to another. For example, some countries may need additional guarantees or impose certain conditions, such as the creation of a reserve fund or compulsory investment insurance. It follows that careful investigation into the legislation of the state chosen is very important, and if necessary, qualified lawyers who specialize in cryptocurrency regulation should be involved.

Licensing by the ICO has turned out to be important in the process of legalisation of cryptocurrency projects and in attracting investments. Getting a license takes a lot of effort and attention to details, but it allows the project to have at least some legal ground to operate, improves its reputation, and protects investors. Carefully choose a jurisdiction for licensing, making sure that your project corresponds fully with all the local legal and regulative requirements.

What for do the projects conduct ICO?

The Initial Coin Offering, or just ICO, is one of the newest ways to raise capital that lately has gained popularity among startups within the blockchain industry. The point is that this method of funding allows projects to issue their tokens or coins in exchange for some cryptocurrency, most often Ethereum or Bitcoin. Over the past couple of years, ICOs have been in the limelight owing to the popularity of this source of crowdfunding for opening up fresh avenues for investors as well as developers. The purpose of projects running ICOs will be discussed in detail below.

The main objectives of the ICOs

Raising capital

The main purpose of the ICO, therefore, is to raise capital for the development and launching of new projects. Unlike traditional venture capital or equity financing, an ICO offers startups an opportunity to raise substantial funds without necessarily giving up a stake in the business or going through complicated dealer due diligence procedures.

Token Distribution

ICOs are used to distribute tokens to the community, which can serve not only as a way to raise finance but also as a mechanism to create a network effect. Distributing tokens to a wide range of users can incentivise their use and increase community engagement.

Marketing and promotion

Launching an ICO in itself is a powerful marketing tool that brings attention to a project. A successful ICO can raise brand awareness manifold and bring in more users and investors.

Testing Token Economics

What ICOs do is provide projects with this rare opportunity to experiment with the structure and rules of the token economy-a way for them to figure out what mechanisms work best in incentivizing, managing, and allocating resources within the ecosystem.

Decentralized community building

Finally, ICOs can create self-sustaining, decentralized communities. Participants may have the chance to become involved in the project’s management and development. A social and economic bond will be developed between the project and its users.

In such a context, ICOs are still an important tool for blockchain startups in raising necessary funds for development and building valuable communities around new projects. But again, an investor should be aware of the possibility of a partial or full loss of investment, high token volatility, and the regulatory risks pertaining to investment in the ICOs. Projects, in turn, should make every effort to ensure transparency and accountability towards the community and investors.

What is an ICO’s legal status?

Initial coin offering is a form of fundraising in which new cryptocurrency and blockchain projects issue their tokens in exchange for ether, bitcoin or other cryptocurrencies. Ever since their emergence, the interest in ICOs among investors and developers has already been huge, but also captured the attention of regulators worldwide. The legal status of an initial coin offering does vary from one jurisdiction to another, given the different regulatory approaches, investor protection, and financial stability objectives.

European Union

In the European Union, token sales do not fall under special legislation. They normally would fall under general financial regulations and directives such as the Markets in Financial Instruments Directive (“MiFID II”) and the Anti-Money Laundering Directive (“AML”). That is to say, projects undertaking ICOs have to undertake Investor Identification requirements and the transparency of the transactions of their investors.

United States

SEC in the US follows the ICO market actively and has repeatedly indicated that many tokens issued within an ICO might be looked upon as securities. This means such an ICO either needs to register with the SEC or find grounds for exemption. The case of the SEC against the DAO was, in this respect, a point where it was clearly and precisely indicated that tokens giving rights to investors with regards to profit sharing or management fall under the definition of securities.

Asia

Approaches to how to handle ICOs vary significantly across the continent. China, for example, went as far as to completely ban the process in 2017 amid a broader campaign against financial technology risks. Japan, by contrast, has taken a more liberal approach, regulating ICOs through pre-existing payment services laws and providing clear guidelines for projects.

Offshore jurisdictions

Some projects choose to conduct ICOs in offshore jurisdictions like Malta, the Cayman Islands, or Gibraltar, because these countries provide better conditions for cryptocurrency startups. These countries have crafted special regulatory frameworks for ICOs in their hope to attract projects with lower taxes and simplified regulation.

The legal status of the ICO is continuing to evolve as regulators all over the world explore the potentials and risks of this new method of financing. Projects desiring to operate an ICO would have high consideration for the legal and regulatory requirements within the chosen place of incorporation. Meanwhile, investors must be cautious and consider attentively the conditions of participation in an ICO while taking into consideration that the risk is very high and everything besides could be changed by legislation. Such an ability of legislations to alter everything makes doubt contingent.

What attracts investors to ICOs?

Initial Coin Offerings have lately become one of the most discussed phenomena in the world of financial technology. A blockchain-based capital-raising tool issues digital tokens and sells them to investors looking to invest in developing a new project. Despite the high level of risk that has been associated with their investment in ICOs, plenty of investors globally continue to invest, hoping to get substantial returns. Let’s now have a look into the key factors that attract investors to participate in an ICO.

Reasons to Participate in an ICO

The investment in ICOs is a quite risky activity that demands an accurate analysis and understanding of the market. Nevertheless, a possible high return, an opportunity to take part in new prospective projects, the attractiveness of decentralization, and speculative interest attract more and more investors despite all the risks. Finally, an investment in ICOs should be really careful, it has to be performed after deep analysis of a particular project, taking into consideration all the changes of the regulatory environment.

What are some of the risks involved in an ICO?

Initial Coin Offerings, or ICOs, are a novel, innovative method for blockchain and cryptocurrency startups to raise capital. However, despite the potential benefits, investing in an ICO comes with a number of significant risks. These risks need to be understood and considered, at least, before making a decision to invest. In the remainder of this article, we investigate some of the main risks of participating in an ICO.

Fraud risk

Another major risk in taking part in an ICO would be fraud. Due to an absence of strict regulation and control, they can run an ICO, collecting funds for an actual legitimate project, but instead disappear along with all of the investors’ money.

Lack of Regulation

The lack of proper ICO regulation creates the conditions not only for fraud, but also for changing the rules of the game. Regulators can introduce new rules or restrictions into the ICO market at any moment, and that might adversely affect projects that are already up and running.

Liquidity problems

Tokens sold during an ICO may experience liquidity problems in their early days following the close of the fundraising campaign. Not all of them immediately get listed on major exchanges, and investors could hardly sell tokens quickly at the needed price.

High Volatility

It is well documented that the cryptocurrency market is extremely volatile. The prices of the tokens might increase and decrease crazily, which makes the investment in ICOs very high-risk. Shortly after purchasing the tokens, investors may get a surprise that the value of their investment has crashed. Because many of the projects are still at very early stages of development, investors run a number of risks in investing in a product that may never come into being. Even assuming the project is completed, it may fail due to poor management, lack of team experience, or changing market conditions.

Technical Risks

Although blockchain technology offers significant advantages, such as security and transparency, it also entails specific risks: code errors, issues affecting security or scalability, may accordingly harm the project’s success and the value of a token.

Legal Risks

They involve legal risks, such as uncertainty in the legal status of tokens, the intervention of possible regulation that may lead to funds freezing, and tokens being prohibited from trading in certain jurisdictions.

While the potential for fantastic investor returns does exist with ICOs, naturally, investors should calculate the associated risks before making any investments. Knowledge of the risks mentioned above and the proper due diligence of the project can reduce the possibility of a loss and make the potential for return on investment greater.

What have been some of the most successful examples of ICOs?

While some have gone further to become milestones in the annals of cryptocurrency history, raising huge sums of investment, putting the spotlight on new technologies and blockchain opportunities, the successful ICOs among them have also helped popularize investments in cryptocurrencies. A few examples of the most successful ICOs that have left their notable mark in cryptocurrency history are given here.

Ethereum

• Box office receipts: More than $18 million
• Year: 2014

Ethereum is, without a doubt, one of the most successful ICOs ever. The platform, which introduced the concept of “smart contracts”, caught the eye of investors, raising over $18 million. Since then, Ethereum has taken its place as the second-largest cryptocurrency after Bitcoin and has been the base of thousands of blockchain projects.

NEO (ex Antshares)

• Box office receipts: 4,5 mln
• Year: 2016

NEO, also referred to as “Chinese Ethereum”, raised $4.5 million in its initial coin offering. The project focused on developing a platform for developing decentralized applications and digital assets, and placed a particular emphasis on scalability and identity.

EOS

• Fees: More than $4 billion
• Year: 2017-2018

The EOS ICO has grown to be one of the most ambitious in terms of fundraising, with over $4 billion raised in a year. It has a next-generation blockchain platform for developing decentralized applications and is focused on scalability and efficiency.

Tezos (XTZ)

• Box office receipts: $232 million
• Year: 2017

Tezos attracted a staggering $232 million, the most raised during any ICO at the time. The project was highly appealing to many due to its unique self-management aspect, the testament to which is its ability to upgrade its network independent of a hard fork.

Filecoin (FIL)

• Box office receipts: $257 million
• Year: 2017

Filecoin traditionally gave the decentralized data storage market a revolutionary way for users to rent their excess disk space. It also showed that there is much interest in innovative blockchain storage solutions through a $257 million ICO raise.

These ICO success stories show how powerful an idea, if underpinned by blockchain technology, can attract serious investments and open the way for new products and services. Even now, when the market is full of offers and more regulated, these success stories continue to inspire entrepreneurs and investors in finding new opportunities that open up in the world of cryptocurrencies.

Licence allows carrying out an ICO

Among all the methods of raising funds, probably the most famous within the world of virtual currencies is the so-called ICO, or Initial Coin Offering, a process in which firms can issue their own tokens in exchange for investment. The right choice of jurisdiction for an ICO is critical because several legal frameworks and tax policies may bring success either to or farther from funding. Lithuania and the Czech Republic offer some of the most attractive conditions for registering and carrying out an ICO within Europe.

Lithuania: dynamic development of the regulatory environment

Lithuania is among those few European countries that have already developed specific guidelines for blockchain projects, including the ICOs. The Lithuanian government actively favors the development of the cryptocurrency market and the blockchain industry by providing transparent and understandable rules for the ICO.

In 2017, the Central Bank of Lithuania published a guideline for the organizers of ICO-projects containing the main principles and requirements towards the ICO, such as transparency of the project, protection of the rights of investors, and compliance with AML. At the same time, Lithuania has a very loyal tax system for cryptocurrencies, which makes it attractive to international investors and start-ups.

Czech Republic: stability and support for innovation

Despite its more conservative approach to the regulation of cryptocurrencies compared to Lithuania, the Czech Republic also offers attractive conditions for conducting ICOs. The Czech legislation has a very high degree of protection for investors and transparency in business processes. The Czech Republic attracts blockchain entrepreneurs because of its stable economy, a high level of property rights protection, and an efficient legal system.

Furthermore, the Czech Republic offers a few tax incentives for technology startups, which can further reduce overall project costs associated with conducting an ICO. Human resources of qualified IT specialists and an investment climate create favorable conditions for the growth and development of cryptocurrency projects in the Czech Republic.

Prospects and challenges

Only serious research on the part of companies into local laws and regulations with respect to both cryptocurrencies and the very process of the ICO itself can really guarantee success in making an ICO in either Lithuania or the Czech Republic. This includes things like transparency, reporting requirements, and investor verification, among other things. Another prerequisite is that a complete business plan and technical documentation of the project should be prepared in accordance with local and international standards.

A choice between Lithuania and the Czech Republic for conducting an ICO largely depends on specific project details and needs. Although there are many differences in the approaches to regulation, both countries have very good conditions for cryptocurrency startups and investors alike. In any case, close cooperation with local authorities and regulators is needed to obtain full legal clarity and compliance.
It is worth noting that Lithuania and the Czech Republic are among those European countries which are most friendly to ICOs due to their supportive approach and developed infrastructure. A country for an ICO should be selected based on a proper weighting of all advantages and possible risks linked with a particular jurisdiction. Both countries allow unique opportunities to realise cryptocurrency projects at a high level.