An Initial Coin Offering, or ICO, is a fundraising mechanism in which new ventures sell coins issued by the fundraiser in exchange for other cryptocurrencies including Bitcoin and Ether. These coins, also known as tokens, can be used represent equity in the company (stocks) or guarantee a service or product at some point in the future. ICOs share many commonalities with an initial public offering (IPO) in which companies raise funds by allowing public investors to purchase shares for the first time.
When a company announces an ICO, they often plan to release one of two types of coin to public investors:
Equity Token: Equity tokens allow companies to sell securities in the form of stock through coin purchases. How blockchain networks transform equity ownership for investors is what makes security tokens an innovative new form of fundraising and corporate governance. Encrypted blocks provide transparency of corporate voting and equity ownership across ownership networks. However, like all securities, these tokens must be registered with the appropriate regulatory entities to ensure their legality; companies seeking to raise funds for new ventures without receiving permission from the regulatory bodies may be subject to criminal prosecution in accordance with local laws.
Utility Token: Utility tokens are different than securities-backed equity tokens as they rely on the expectation of providing a product of service rather than a direct profit. In 2017, six major banks including Credit Suisse and UBS developed their own utility coin to be used for interbank payments, bypassing the previous need to depend on the sluggishness of brokers or traditional money transfers. In the coming years, utility tokens will likely comprise an endless array of uses and should not be subject to governmental regulation if they are demonstrably not securities.