Initial Coin Offering (ICO)

ICOs are primarily used to release new cryptocurrencies onto the market and to realize initial corporate financing. Increasingly, ICOs are also being used to finance projects.

Via an Initial Coin Offering (ICO), new crypto coins are distributed to the public. The purpose of ICOs is usually corporate financing or project financing via crowdfunding in the blockchain ecosystem. In this process, issuers emit tokens representing virtual company shares. In exchange for the tokens, they receive capital that is to be used for the establishment and expansion of their company/project. Investors or supporters can purchase these tokens to support the venture and/or hold or resell them in (speculative) anticipation of future price gains.

Unlike STO, however, ICO are not regulated by BaFin. This also means that the tokens issued in the ICO do not represent (notarized) ownership. Accordingly, investors are neither automatically entitled to profit distributions (dividends) nor to voting rights.

Two types of tokens are distributed via ICO:

1. Utility tokens are digital vouchers. They do not represent any rights to the company or project, but rather are to be used as a means of payment by the token holders after completion or project completion. If a project is successful, the demand for the tokens increases and thus the price (the price rises).

2. Revenue share tokens are similar to shares in their basic function: they entitle the token holder to receive profit distributions (dividends). While utility tokens are always linked to a blockchain case (the tokens are needed to operate the platform or individual functions on it), revenue share tokens do not necessarily have to fulfill a functional purpose. Depending on the technical implementation, the distribution can be automated via smart contracts or manually claimed by the token holders.

ICOs have tarnished the reputation of blockchain investing. Unfortunately, many ICOs have failed in recent years, either because they could not reach the desired investment target, because the start-up or business proposition failed, or because fraudsters disappeared with the collected capital - in 2017, more than 80% of ICOs are estimated to have been frauds, according to SATIS Group. As a result, many investors made large losses and now view ICOs critically. To mitigate the risk, a new form of ICOs has emerged called Initial Exchange Offering (IEO).