ICOs vs. IPOs: the Big Differences Explained, Plus Other Financing Options

Eric Pesale

Eric Pesale is an attorney and entrepreneur who writes about business and legal issues for law firms, publications, and companies as the founder and chief legal contributor of Write For Law℠ (https://writeforlaw.com). He is a graduate of New York Law School and the University of North Carolina at Chapel Hill, and has been published in CSO, the New York Law Journal, and Above the Law.He is actively engaged with startup business issues, and also helps with Barkitwear® (https://barkitwear.com), a family-run, USA-made dog products company.

Bitcoin mania, startup unicorns, blockchain technology, ICOs vs. IPOs—and lots of other things that don’t sound real but completely are. Welcome to the world of modern business! If you’ve been lost on the definitions on any of these, you’re not alone. This world moves very fast.

Since it’s impossible to go through everything, let’s focus here on the difference between ICOs vs. IPOs. They’re both ways to garner funding from your business, but they’re actually very different.

You likely know by now that the rising popularity of cryptocurrencies means that the decentralized recordkeeping technologies powering these currencies—including blockchain—are here to stay. In the process, new strategies such as ICOs (short for “initial coin offerings”) and cryptocurrency-based funding are now happening for startup financing alongside IPOs (“initial public offerings”), crowdfunding, equity financing, and debt financing.

icos-vs-ipos

Yes, exploring ICOs vs. IPOs is definitely an exciting time for entrepreneurs—digital currency in itself is pretty exciting. At the same time, these new options aren’t necessarily for everyone, and can come with legal risks that could make more traditional financing options more attractive.

As your company balances the benefits and drawbacks of the ICOs vs. IPOs debate, it’s helpful to have at least some knowledge about how initial coin offerings work and how they differ from the more traditional initial public offering.

ICOs vs. IPOs: What’s the Difference?

Both ICOs and IPOs encourage investors to invest in growing companies, for sure. But the chief difference between ICOs vs. IPOs is an investor receives in exchange. And it’s a big difference.

Initial Public Offerings (IPOs)

In an IPO, a company works with an underwriter to sell ownership units of its company—known commonly as stock—to investors and the public to purchase and sell on regulated exchanges. We’re talking the NYSE, NASDAQ, etc.—the big guys.

Although companies can offer different classes of stock, owning stock usually entails ownership rights in the company, along with perks such as shareholder voting and eligibility for dividends. Stocks and stock trading are also regulated by the Securities and Exchange Commission (SEC).

We’ll get back to this regulation point in a second.

Initial Coin Offerings (ICOs)

Investors participating in ICOs, however, don’t receive any kind of ownership stake or rights in the company conducting the ICO. Instead, ICO investors exchange run-of-the-mill fiat currencies such as dollars and euros—or, more commonly, established cryptocurrencies such as Ether and Bitcoin—in exchange for bulk amounts of the company’s own newly established cryptocurrency.

The ICO company therefore receives the cash influx it needs to fund its activities, while the investor walks away with bulk amounts of the company’s own cryptocurrency tokens. The hope for investors here is that the coins they receive later appreciate in value—much like Bitcoin and Ether did in dramatic fashion last year.

Although this strategy is risky, investors could reap major rewards if the value of their tokens skyrockets.  

icos-vs-ipos

Regulation Differences Between ICOs vs. IPOs

ICOs have grown into a popular investment vehicle for fintech and cryptocurrency companies—particularly because unlike IPOs, ICOs are unregulated. (Like we said, that regulation thing would become important again.) The format can allow startups to raise equity directly from individual investors without dealing with the cumbersome securities regulations tied to IPOs. In 2017, companies raised more than $5 billion in ICO funding, while 2018 ICO rounds have already raised nearly $3 billion since January.

Governments are only just starting to consider cryptocurrency regulations, which could make launching ICOs risky from a legal standpoint. The SEC has already warned that some ICOs may need to be registered with and regulated as securities if they fall under federal legal definition for securities—which goes beyond traditional stocks.

icos-vs-ipos

In July 2017, for example, the SEC found that a company offering DAO Tokens should have been registered with the SEC because the tokens were determined to be a type of security called an “investment contract.” Although the SEC didn’t impose sanctions against the company, it did warn that some ICOs may need to be registered with the SEC depending on the facts and circumstances of each offering.  

With these fuzzy regulations, if you’re not 100% sure this is the right avenue for your company, know that some companies might want to lean away from ICOs in the ICOs vs. IPOs debate.

Alternative Financing Options for Entrepreneurs Besides ICOs

If you’re looking into the differences between ICOs vs IPOs, it’s very possible that you’re looking for ways to finance your business.

Beyond the question around SEC regulations, ICOs aren’t quite right for a lot of small business—and this’ll likely be the case if you’re launching your company outside the fintech space, or if you don’t want to bring in outside investors.

Fortunately, you have some business loan options through traditional financing routes. If you haven’t already explored these, here’s a top-level look at some small business loans and other types of credit that could help your business get the cash it needs, no ICO necessary:

1. Apply for a bank or SBA loan.

Commercial bank and SBA loans can be a great option for receiving capital without needing to relinquish equity to outside investors. A heads up that these are hard to get, and your personal credit score and business’s cash flow history will factor into your loan eligibility.

But if your business has a stellar profile, these are the most coveted small business loans available, with the most competitive rates and best repayment terms.

2. Open a business line of credit.

Similarly, you can look into opening a business line of credit. This works similar to a credit card in that you can borrow up to certain maximum agreed-to amounts, and you’ll only pay interest on what you use—but sometimes, the interest rates are lower than business credit cards if you tend to carry balances.

Here, you’ll have easy access to capital, and there are a range of products available depending on your creditworthiness.

3. Take on a crowdfunding effort.

Depending on the types of investors you’re targeting, crowdfunding may be a good way to promote your product and collect funds from friends, family, and others interested in what you’re doing.

You should definitely be aware, though, that the SEC has adopted crowdfunding regulations specifying what types of crowdfunding activity are permissible and legal.

4. Applying for grants and competitions.

Sure, this might not be your best route for companies needing immediate cash flow, but grants and competitions can also be a great way to receive free funding and attention for your company with no strings attached.

While you work on getting access to capital now, plan for the long term, too, and consult this comprehensive list for federal and state small business grants.

***

In the end, you have lots of choices at your disposal for funding your business—including those outside the ICOs vs. IPOs equation. You just need to make sure your financing strategies meet your business goals. Consulting with experienced business attorneys who know your business needs well could help you learn about which forms of financing are best for your business.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Eric Pesale

Eric Pesale is an attorney and entrepreneur who writes about business and legal issues for law firms, publications, and companies as the founder and chief legal contributor of Write For Law℠ (https://writeforlaw.com). He is a graduate of New York Law School and the University of North Carolina at Chapel Hill, and has been published in CSO, the New York Law Journal, and Above the Law.He is actively engaged with startup business issues, and also helps with Barkitwear® (https://barkitwear.com), a family-run, USA-made dog products company.

Our Picks

Ready to Grow Your Business?