ICO (Initial Coin Offering) is a way of raising money by selling a newly created crypto token to investors, usually to fund a blockchain network or application. Buyers pay in crypto-assets or fiat and receive tokens that may give access to a service, a share of network fees, or nothing beyond the hope of resale. The issuer publishes a document on supply and use of proceeds, sells through a smart contract or platform, and usually lists the token on an exchange afterwards. Unlike an IPO, an ICO historically had no approved prospectus or ownership rights. In the EU, MiCA now requires a notified white paper for public offers, and past token sales become diligence items because liabilities follow the entity.
How does an ICO work
The issuer publishes a document describing the project, the token supply and how proceeds will be used, then sells tokens through a smart contract or a sale platform for a fixed period or until a cap is reached. Tokens are typically listed on a crypto exchange afterwards so buyers can trade them. A project selling 100 million of a 1 billion token supply at €0.05 raises €5 million and implies a fully diluted value of €50 million for a product that may not yet exist.
ICO vs IPO vs STO
An IPO sells company shares under securities law, with a regulator-approved prospectus and audited accounts. An ICO historically sold tokens with no such approval and no ownership rights. A security token offering (STO) sells tokens that are themselves securities, so securities law applies in full.
Whether an ICO token is a security depends on the jurisdiction and the facts. In June 2020, Telegram settled SEC charges over its sale of about 2.9 billion "Grams" to 171 initial purchasers: a US court ordered disgorgement of $1.224 billion, credited against money returned to investors, and Telegram paid an $18.5 million civil penalty.
How are ICOs regulated in the EU
The Markets in Crypto-Assets Regulation (MiCA) replaced the unregulated model for tokens that are not already financial instruments, e-money tokens or asset-referenced tokens. An offeror to the public must be a legal person and must draw up a crypto-asset white paper, notify it to its home regulator at least 20 working days before publication, and publish it. The regulator does not approve the white paper, but the offeror is liable for its contents.
Article 4 exempts offers made to fewer than 150 persons per member state, offers totalling no more than €1 million over 12 months across the EU, and offers addressed only to qualified investors. A €3 million public sale to EU retail buyers falls outside every exemption.
Service providers that place, custody or list the tokens need a CASP authorisation of their own.
ICOs in licensed crypto M&A
For an acquirer of a crypto business, a past token sale is a diligence item: whether a white paper was required and notified, whether the token could be classed as a security in any market where it was sold, and whether proceeds are held by the company or a foundation. Unresolved token-sale liabilities follow the entity, not the founders, and are usually covered by specific indemnities.