by David Menzie
At Blockfolio, we strive to give you an objective picture of your cryptocurrency holdings and useful, relevant news. With that said, some of the products and services mentioned here are from ourselves or our partners. However, this doesn’t influence our evaluations. Our analysis is entirely our own.
What is an IPO?
Before we dive into initial offerings in the cryptosphere, let’s first cover what an Initial Public Offering is. An Initial Public Offering (IPO) describes how a company first offers shares (also known as equity) to the public - institutional or "mom & pop" investors like you or me - in exchange for funds, usually cash, through a licensed stock exchange. In the United States, a company looking to IPO will typically work with investment banks and the Securities Exchange Commission (SEC) to make its shares available for sale at a price-per-share derived from its total enterprise value. For a recent example, Lyft, a San Francisco-based ride-hailing company, wanted to raise money through public markets to expand its operations and grow revenue. As is customary, Lyft hired investment banks JPMorgan & Chase and Credit Suisse to underwrite - determine a total enterprise value and share price for - its IPO. These investment banks reviewed Lyft’s private financial statements, benchmarked Lyft against competitors such as Uber, and adjusted for various macroeconomic and industry forces to arrive at a total enterprise value of $80B. Next, these banks “tested the market” by surveying potential investors to gauge demand for shares of the $80B company at various price points. Combining the survey results with their IPO expertise, the investment banks determined that a price range of $70 - $80 per share would best balance supply and demand while maximizing funds raised. Following SEC approval, Lyft “debuted” on the NASDAQ - the second largest US stock exchange - at $72/share, immediately raising $8.1B for the company after it sold 100M shares of stock to public investors.
What is an ICO?
An Initial Coin Offering (ICO) is a relatively new fundraising phenomenon, falling somewhere on the gradient between an IPO and crowdfunding - soliciting online microdonations for a cause. To initiate the ICO fundraising process, a cryptocurrency or blockchain-based company will first tokenize itself - create its own cryptocurrency “token”. Next, since the ICO company or project isn’t able to formally legitimize or market its token by working through investment banks or government agencies, it typically uses its ambitious vision, a whitepaper, reputable founders, a flashy token name, and/or a “who’s who” of venture capital or angel investors to generate marketing “cyberbuzz” leading up to its ICO. After this “market testing” or “campaign” phase, the company or project will then make its token available directly to public investors around the world.
Unlike IPOs, which are offered indirectly to investors through a third-party exchange such as the New York Stock Exchange, a distinguishing feature of an ICO is that tokens are made available (listed) directly to investors. Therefore, after conducting careful research, potentially through Blockfolio Signal, any interested investor can directly participate in an ICO by:
- Registering through the company’s website
- Owning (or purchasing) Bitcoin, Ether, or another ICO-supported cryptocurrency
- Transferring cryptocurrency to a protected virtual wallet
- Sending cryptocurrency to the Initial Coin Offerer’s public key
Since this process may seem deceptively simple, I’ll mention that any ICO involves significant risks, which may or may not be justified by the upside potential. For instance, if enough investors participate and the token project generates momentum, then ICO investors stand to gain handsomely. For example, Etherium’s July 2015 Ether ICO has gained an astonishing 279,843% to date! However, if the project fails to deliver against its lofty promises or investors lose faith in the token’s prospects, ICO investors stand to lose everything and have no legal recourse to make financial claims against the company. For one sobering ICO statistic, according to Cointelegraph nearly 50% of ICOs have failed within the first four months of launch.
In summary, the public equity offering and investment return components of an ICO closely resemble an IPO. However, the limited oversight, high risk of financial loss, and direct-to-customer offerings more closely resemble a crowdfunding campaign. In practice, then, most ICOs fall somewhere in between an IPO and a crowdfund.
What is an IEO?
In the ashes of many high-profile ICO flops and outright bans, a more structured process, whereby a new token is listed through a cryptocurrency exchange, formed. This process, dubbed an Initial Exchange Offering (IEO) is a “mutation” of the ICO and has helped bring more legitimacy, transparency, and trust to public token offerings.
Operationally, the IEO more closely resembles an IPO than a crowdfunding campaign. Much like an IPO, a token project seeking to raise capital through an IEO will formally apply for a token listing with a supported exchange, for example Binance. In return for the listing, Binance may keep a fixed percentage “listing fee” and a negotiated percent equity claim. If, say, this fee structure was 1% / 2%, then Binance would earn $1 for every initial $100 in market capitalization listed, then 2% of all returns (or losses) generated by the token. Given the fee structure and the desire to maintain its reputation, Binance has high incentive to conduct careful due-diligence - verifying the legitimacy of a prospective asset purchase - before it lists the token on its own exchange. If Binance uncovers fraud or materially misleading claims during its due-diligence, it will reject (and maybe even blacklist) the token, thereby protecting would-be investors from ICO-like losses. This system of “checks and balances” built into the IEO process has brought much needed oversight to token projects and listings, which has, in turn, significantly decreased the failure rate. According to Cointelegraph:
“Breaking it down by category, 83% of the 694 ICOs that don’t report capital and don’t list on an exchange are inactive after 120 days. For the 420 ICOs that raise some capital but don’t list, this figure falls to 52%, and for the 440 ICOs that list on an exchange [IEOs], only 16% are inactive in the fifth month.”
In summary, although investors may miss out on some upside potential caused by the necessary IEO time-lag, these listings involve much less counterparty risk as the highly incentivized exchanges conduct the due diligence on investors’ behalf. Because of this additional layer of oversight, IEOs look much more like IPOs and much less like crowdfunds.
Portfolio Tracking Apps and Initial Offerings
Any initial offering through a supported exchange, whether an IPO or IEO, may become immediately available for the portfolio-tracking public to...well..track! In the Lyft IPO example, the LYFT “ticker” symbol was made immediately available on fiat portfolio tracking apps for investors, speculators, or other interested smartphone users to track the stock’s IPO performance in real-time. Similarly, whenever a supported new token is listed by an IEO-supported exchange, such as Binance, the token may become immediately available on popular cryptocurrency portfolio tracking apps, such as Blockfolio. In general, if you’re a current or prospective cryptocurrency investor, watching - keeping track of - coin debuts and short-term price performance will help you better understand the risks and volatility of new tokens, and ultimately help you decide if participating in either (or both) IEOs or ICOs is right for you.