Our honourable Prime Minister has consistently asserted that we should have an entrepreneurial mindset and introduced a new campaign start-up in India. As India is high on the demographic dividend, the start-up wave is necessary to upscale India's economic growth. The young entrepreneurs who want to convert their business idea into reality are looking up different opportunities such as raising funds through angel investors, Initial Public offerings and loans. However, there is an advent of a new type of fundraising called Initial Coin Offering in the market.
Initial Coin Offering is a new concept which emerged along with cryptocurrencies. To understand the idea most easily, equate it with IPO(Initial Public Offering).Like in IPO, where companies use stock exchanges as a way to raise funds. Similarly, ICO is a way to raise funds through a crypto verse. Any crypto-based start-up offering a new coin, token, Dapp or other related product and services can opt for ICO
However, when an enterprise goes for public funding or IPO, its owners will relinquish some stake or ownership rights in return for funds raised through public financing. This rule doesn't apply to enterprises opting for ICO.In ICO, the enterprise will offer coins or tokens in return for funds raised through the participants involved in ICO. The tokens or coins offered at the time of ICO are not valuable, but they are speculated to give profits to the investors in the near future.
Although ICO is regarded as the easiest and most accessible option available for crowdfunding because there are no rules and regulations to monitor the company involved in ICO, plus the surge in prices of cryptocurrencies is also a significant factor which has led to the popularity of ICO worldwide. However, this very reason makes ICO a risky investment platform. Still, there are criteria set for companies and investors.
The company that wants to participate in an ICO needs to present a whitepaper regarding the product or service it intends to launch in the market. The whitepaper contains all the necessary details and is the product's blueprint. Details include the purpose it fulfils, the kind of technology it will use, its protocols, etc. On top of it, the company also needs to clarify some important information like how much money is required to be raised from an ICO, in how much time and how many tokens/coins the founders will keep with themselves.
Investors can invest via cryptocurrency and can also use fiat money. If ICO fails to generate the targeted funds within the stipulated time, the company returns the money to the investors. If the IPO succeeds, the company encashes the funds collected via cryptocurrency or fiat money. Investors can encash their collected tokens or coins according to the market price later.
There are three types of ICO in the market:-
• The company set a specified funding goal and the token price to be sold at ICO. Here the price and supply of tokens/coins are fixed.
• When a company decides to have a specified supply of tokens/coins but dynamic funding goals, the amount of funds received at the ICO determines the overall price of a token.
•When a company decides to have a dynamic token/coin supply but a fixed price of token/coin, here theamount of funding received during IPO determines the supply of coins/tokens.
ICOs are risky investments as there is no regulatory body to look after the ICO like SEBI (Stock Exchange Board of India) for IPOs. Hence, it becomes imperative for all investors to have good market research and analysis of the company, its leadership, market reputation and most importantly, a thorough study of the crypto project for which funds are needed. If the investor finds anything suspicious about the above mentioned subjects, then the investor should not participate in the ICO.
Lastly, talking about Indian companies – Cab aggregator start-up Drivezy already went for ICO in 2018 in a phased manner in the Japan market. Zebi, a company for NFTs dedicated to cricket based out in Hyderabad, had also raised $2 million in just six days from the market.
ICOs in India are still a grey area as the Indian government is yet to take a call on them. Still, experts from the crypto verse are confident it wouldn't be banned in India as the government has levied a tax on cryptocurrencies. They least expect that SEBI can intervene as a regulatory body if required, just like the SEC ( Securities and Exchange Commission) intervenes to prevent fraud in the USA.
There are many more things to unfurl concerning ICOs. Many new tech-savvy start-ups are looking for ICO fundraising. Well, the ICOs come up with their risks and advantages. It depends on the investors' financial consciousness and how they capitalise on the gains from ICOs.
By Manish Makkar