IPO vs. ICO – The Purpose and the Utility

IPOs and ICOs have much in common, but also have fundamental differences. In our series of articles we will explain main differences between initial public offering (IPO) on the stock exchange and initial coin offering (ICO) on the crypto currency market. 

Why do companies conduct an IPO?

IPO allows young companies to raise risk capital in order to make investments and expansions. Larger, existing companies can also go the way of an IPO to make their shares tradeable. Owners are transferring their holdings. In this case, it is rather an “exit”, ie the (partial) sale of the company.

The stock exchange ARD describes this as follows:

“An IPO provides a company with risk capital from the outside by using the stock as a financing instrument.”

Why do companies run an ICO?

Currently ICOs are mainly used by young companies and start-ups. They are usually used to finance future projects – often decentralized platforms. On the other hand, they are less likely to be existing companies that conduct an ICO to make their shares tradable and sell their own shares.

What is the utility of a stock and a token?

There is another difference in the utility, that is, the usability of token vs. token. Shares. While stocks are in any case a pure financial construct for representing company shares, tokens can also have a utility. This means that these tokens have a clear purpose in the project. So, eg. B. needed to use the platform. A token doesn’t always have a utility and, just like a stock, can only represent a profit entitlement component, but in principle a token can also be used as a commodity in comparison to the stock.

How will the function of ICOs change in the future?

As already indicated, an ICO can both constitute a pure financial vehicle for profit entitlement shares and launch a token that complies with a certain utility. Therefore, the above distinction between ICOs and IPOs is not selective but should be considered over time.

Although, most ICOs currently prefer a utility token, it is easy to imagine that there will be a trend towards tokens representing a share in the coming years as well. Even though a token acts only as a share, it offers certain advantages over stocks traded on a stock exchange (more on that later in this series). This would extend the scope of application far beyond decentralized platforms and Blockchain projects to any company. Until then, however, a clearer regulation is needed.

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