There are significant differences between an initial public offering (IPO) and an initial coin offering (ICO) and before you invest in either option, it is important to understand those differences and the risks associated with each.
What is an IPO
An IPO is the first sale of a company’s stock issued to the public via a stock exchange, usually to accelerate the growth of the company with the increase in capital. There are a multitude of steps required to turn a company from a private one to a public one; meeting eligibility thresholds, significant compliance with ASIC and the ASX, securing a sponsoring broker or underwriter, independent financial due diligence, Board appointments and a detailed prospectus. These steps are required before any funds can be raised from potential future shareholders.
What is an ICO
An ICO is a way to crowdfund a cryptocurrency or blockchain project. There are no legal requirements prior to undertaking an ICO (yet) and it is largely unregulated (at the moment). Rather than a prospectus, most ICOs produce a whitepaper and a roadmap. The whitepaper contains key information about the project, including the details of the team behind the token or coin and the roadmap contains a timeline. An ICO investment is high risk as you are investing in the project’s future; whereas with an IPO, you are becoming an owner of the business.
As an investor in an IPO, you will own a piece of the business and may receive dividends. These dividends may have attached franking credits which can form part of your overall taxation and investment strategy. An ICO token or coin may provide a dividend in the form of additional tokens or coins but these are not paid to you in fiat currency, so if you want that value in dollars in your bank account, you will need to sell them on an exchange and realise the tax implications of that sale.
An IPO is a slow process, often taking months from the time you completed your application form until the time you may be issued the equity. Allocations to traditional retail investors may be limited as preference is often given to, for example, the underwriting broker. An ICO is much faster and, provided you have completed some initial paperwork on the ICO’s site and have your cryptocurrency ready to trade for the token or coin, you can participate.
The return on your investment obviously depends on several factors. Many IPOs have had lacklustre performance and many ICOs have failed but there are success stories. Infant formula manufacturer Wattle Health Australia listed on the Australian Securities Exchange in March 2017 at 20 cents per share and last traded at $2.26. Antshares (now NEO) held its first ICO in October 2015. The ICO lasted for 10 days and the price was 23 cents. It is now approximately $87 per coin. These results are seductive but for every IPO and ICO success story, there are several that fail. There is less of a likelihood of this happening in the IPO space due to regulatory requirements outlined above.
A sensible investment portfolio will be weighted according to your own risk profile and other factors. BDH Leaders can assist you in determining the right balance for your needs. Contact us for further information.
The information in this article is general guidance only and should not be interpreted as an endorsement of any particular investment. All investments carry risks and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.