What Is an ICO (Initial Coin Offering)?
An ICO, or initial coin offering, is when a crypto project raises money by selling its newly created token directly to investors. The model peaked in 2017 and lives on today as IEOs, IDOs and launchpad sales.
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An ICO, or initial coin offering, is when a crypto project raises money by selling its newly created token directly to investors. Participants usually send ETH, BTC or stablecoins and receive the project’s token in return. The idea borrows from the IPO, but most of an IPO’s safeguards, such as underwriters, a prospectus and regulatory approval, are missing from a typical ICO.
How does an ICO work?
A project first publishes a whitepaper describing the product, roadmap, team and token distribution. It then announces the sale schedule, the token price and which assets it accepts. The sale usually runs through a smart contract: investors send crypto to the contract, which distributes tokens either immediately or after the sale ends.
Tokens sold this way are most often issued under Ethereum’s ERC-20 standard. If the token is later listed on an exchange, it starts trading on the secondary market.
What are soft caps, hard caps and bounties?
A soft cap is the minimum a project needs to raise to go ahead; if it isn’t reached, the team may promise refunds. A hard cap is the maximum the sale will accept, after which it closes. Bounty campaigns reward people with tokens for promoting the project, finding bugs or creating content.
For example, a sale with a $2 million soft cap and a $10 million hard cap that raises only $1.5 million might trigger refunds, while one that hits $10 million stops accepting contributions. Whether those promises are honored depends on how the sale contract is actually coded.
A brief history of ICOs
One of the first token sales was held by Mastercoin in 2013. Ethereum’s 2014 presale, which raised bitcoin worth around $18 million, brought the model to wider attention. In 2017, the ease of launching ERC-20 tokens fueled hundreds of ICOs, and some projects, such as EOS, raised billions of dollars.
Many of those projects never shipped a product, and some turned out to be scams. In 2017 the US Securities and Exchange Commission published a report stating that some token sales could be securities offerings, and it went on to take action against many ICOs. Telegram’s TON project, funded by a 2018 token sale, was forced to return money to investors in 2020 after an SEC lawsuit.
ICO vs IEO vs IDO
- ICO: the project sells tokens directly through its own website and contract.
- IEO (initial exchange offering): the sale runs on a centralized exchange’s platform; the exchange vets the project and participants must complete KYC.
- IDO (initial DEX offering): the token is sold through a decentralized exchange or launchpad and usually starts trading right away.
What to check before joining a token sale
Key questions are whether the whitepaper describes a concrete product, who the team is and what they have done before, how tokens are distributed and how long team tokens are subject to vesting. It also matters whether the sale contract has been independently audited and where the raised funds are held. Promises of guaranteed returns are a red flag, both legally and as a sign of fraud.
Frequently asked questions
Do ICOs still happen? Classic ICOs became much rarer after 2018. Similar fundraising models continue as IEOs, IDOs and launchpad sales.
Is an ICO token like a share? Usually not. Unless explicitly stated, token holders get no ownership, dividends or management rights in the company.