Cryptocurrency is quickly becoming a popular form of money for significant funding needs. Some businesses will even use virtual currency for start-up capital. However, there are a few things you will need to know before you jump into digital funding.
What Are Initial Coin Offerings?
One benefit that comes with bitcoin and similar digital currency is the fact they are not regulated. Therefore, you can crowdfund in a way that meets your needs. An initial coin offering, or ICO, is the initial product sold to investors to raise capital. These tokens are a form of blockchain and are created from free source code available from the established digital network, such as Bitcoin. Many businesses hire professional developers to edit the code to make the assets. From there, the investors hold a promissory note from the start-up company. Due to this being all regarding promises, it can be challenging to find people willing to take the leap of faith. They are successful when the business can display a promising business plan, as well as build trust. In all reality, it is the same leap of faith that investors put into regular start-up funds without the ability to pull funds back out.
How are ICOs and IPOs Related?
ICO stands for Initial Coin Offering, while IPO stands for Initial Public Offering. ICOs are inspired by how IPO works, but they do not give investors any ownership rights to the company. Most offerings purchased from investors in an ICO will not have a functional purpose. They are cheaper, do not rely on stock exchanges, and have less paperwork to deal with. Therefore, they allow a company to raise more capital faster than with an IPO.
Are ICOs Legal?
Currently, ICOs are legal in the United States and the United Kingdom. However, they are not permitted in China and South Korea. Outside of these countries, you will need to check with your financial advisors and lawyers to ensure you can utilize them for your start-up. The governing officials cannot regulate these funds, making it hard to keep up with the digital currency. If you are considering investing, make sure you know what the purpose will be for the funds. However, if you are a company offering ICOs, follow your lawyer’s advice. Many scammers inflate the price of tokens and perform a dump once they have obtained enough tokens. The price will immediately fall, and investors are out the money.
Final Thoughts
Financial firms understand that digital currency is growing in popularity, and it makes starting a business easier. However, others fear the concept of creating a coin out of source code. Whether you invest or not is entirely up to you. It is best to consult with a financial advisor and do thorough research on the business offering it. If you are considering using an ICO to create a start-up, make sure you provide something in return that is attainable. Keep your business plan public and be honest with the process.