An initial coin offering (ICO) is an event where a company sells a new cryptocurrency to raise money. Investors receive cryptocurrency in exchange for their financial contributions.
In many ways, an ICO is the cryptocurrency version of an initial public offering (IPO) in the stock market. While it's possible to make sizable profits through ICOs, a lack of regulation makes them extremely risky. In this guide, you'll learn all about ICOs, including how they work and some notable examples.
ICO vs. IPO
ICOs are often compared to initial public offerings (IPOs), a new stock offering by a private company. Both ICOs and IPOs allow companies to raise funds.
The primary difference between ICOs and IPOs is that IPOs involve selling securities and are subject to much stricter regulations. A company that wants to conduct an IPO must file a registration statement with the U.S. Securities and Exchange Commission and get its approval. The registration statement should include a prospectus that provides financial statements and potential risk factors.
An ICO is the sale of a cryptocurrency, not a security. For that reason, it doesn't have any formal requirements like IPOs do. But if a company tries to get around requirements by conducting an ICO for something that fits the definition of a security, it could run into legal troubles.
Although both ICOs and IPOs have their risks, IPOs are safer because they're regulated. If you're overwhelmed by all the ICOs out there, the best IPO stocks are worth a look as an alternative.
How are ICOs regulated?
ICOs are largely unregulated. In the United States, there aren't any regulations that apply specifically to ICOs. However, if an ICO fits the classification of a securities offering, then it falls under the SEC's jurisdiction and is regulated by federal securities laws.
Some countries have taken a strict stance and banned ICOs entirely. Countries that have banned ICOs include China, Nepal, Bangladesh, Macedonia, Bolivia, and Ecuador.
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