How Does an ICO Work?

An initial coin offering is a sophisticated process that requires a deep knowledge of technology, finance, and the law. The main idea of ICOs is leveraging the decentralized systems of blockchain technology in capital-raising activities that will align the interests of various stakeholders. The steps in an ICO are listed below:

1. Identification of investment targets

Every ICO starts with the company’s intention to raise capital. The company identifies the targets for its fundraising campaign and creates the relevant materials about the company or project for potential investors.

2. Creation of tokens

The next step in the initial coin offering is the creation of tokens. Essentially, the tokens are representations of an asset or utility in the blockchain. The tokens are fungible and tradeable. They should not be confused with cryptocurrencies because the tokens are just modifications of existing cryptocurrencies. Unlike stocks, the tokens generally do not provide an equity stake in a company. Instead, most of the tokens deliver their owners some stake in a product or service created by the company.

The tokens are created using specified blockchain platforms. The process of the creation of tokens is relatively simple because a company is not required to write the code from scratch as in the creation of new cryptocurrency. Instead, existing blockchain platforms that run existing cryptocurrencies such as Ethereum allow the creation of the tokens with minor modifications of the code.

3. Promotion campaign

At the same time, a company usually runs a promotion campaign to attract potential investors. Note that the campaigns are commonly executed online to achieve the widest investor reach. However, currently, several large online platforms such as Facebook and Google ban the advertising of ICOs.

4. Initial offering

After the creation of the tokens, they are offered to the investors. The offering may be structured in several rounds. The company can then use the proceeds from the ICO to launch a new product or service while the investors can expect to use the acquired tokens to benefit from this product/service or wait for the appreciation of the tokens’ value.