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ICO vs Crowdfunding

ICO vs Crowdfunding

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ICOs have been described by market participants as “crowdfunding on the blockchain”. In fact, ICOs, where tokens are used as a means of exchange for future use of a product/service that is still under development, are similar to reward-based crowdfunding, as in both cases companies24 to pre-sell a product or service that has yet to be built. Prize-

based crowdfunding offers non-monetary tangible (e.g., product) or intangible (e.g., reputation, identity) rewards in exchange for funding (Lambert & Schwienbacher, 2010).

Comparing equity crowdfunding to ICOs is not as straightforward, as most ICOs do not provide equity ownership or participation in the issuing company’s future revenue streams.25 Although the decision of investors to invest in equity crowdfunding is based purely on financial profit motivation, investors who invest funds in reward-based crowdfunding may have non-financial motives, such as an interest in receiving awards, their willingness to support ideas or to be involved in the community.

Both financing mechanisms are based on technology and online payment systems to facilitate transactions, and both are suitable for seed and initial stage financing of start-up companies. In the case of crowdfunding, the products or services are usually at a more advanced stage of development, with at least a prototype in place at the start of the campaign, compared to ICOs, which are mostly at the concept level at the time of offering.

In addition to fundraising, both funding mechanisms aim to encourage the early adoption of a product and the formation of a community around their project. It can be safely assumed that due to the nature of distributed ledger technology, the network effects of ICOs are more important than those found in crowdfunding campaigns.

Unlike crowdfunding, where you need an online crowdfunding platform (Kickstarter, RocketHub) to launch a campaign, ICOs do not rely on an intermediary. Intermediaries are replaced by blockchain, which eliminates the corresponding intermediary costs and benefits from the efficiency generated by the use of DLTs. Meanwhile, other costs associated with ICOs, such as listing costs, are non-existent in crowdfunding. Although both structures have small ticket investments, the final fundraising size is usually larger in ICOs, and thus any comparison of costs between the two funding mechanisms may be misleading given the differences in their funding sizes.26

Another important difference is in the pricing of the products. A company that launches a crowdfunding campaign that allows pre-purchase of its product must determine the price of the product in advance. An ICO has no price commitment for the price of its future services (Agrawal et al., 2013, Catalini and Gans, 2018).

Another important parameter is that crowdfunding platforms are interested in choosing credible projects for the campaigns they list, taking into account the reputational risk associated with the platform. The only reputational risk associated with an ICO is that of the entrepreneurs themselves, as there is no verification by an independent agent with the same interests.

The crowdfunding platform’s own interest affects the publication of offers. In the case of an ICO offering without specific disclosure requirements, the contents of the ICO announcement may be published without prior due diligence or third-party verification. On the other hand, the crowdfunding platform’s own interest in ensuring its credibility requires a minimum control of the content of the crowdfunding data to ensure the quality of the documentation.

It is important that both crowdfunding and the ICO offer reach a much wider investor base, allowing private investors to participate in the financing of SMEs and start-ups. In the current ICO format, and especially when the offering is not regulated, there are no restrictions on the profile of a potential investor. In the case of crowdfunding and depending on the jurisdiction, restrictions may apply to the pool of potential investors. In the United States, the statutory definition of “accredited investor” takes into account financial standing in the net worth/net income tests or educational/professional expertise established by certain regulatory authorities.

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