Crowdfunding vs ICO: major differences

ICO (Initial Coin Offerings) is sometimes called a new step in crowdfunding development or even an alternative IPO (we will introduce the topic in the following publication – stay tuned). On the other hand, ICO has something in common with crowdfunding: both are methods to raise money for some project on the initial stage, when the company has no finished product.
What is crowdfunding? Crowdfunding is a way for people, groups or businesses to raise money directly from the public without using the bank as the mediator. As loans are becoming increasingly difficult for people and small businesses to qualify for, crowdfunding has become a very popular alternative. Crowdfunding is used to fund a need or a project by raising small amounts of money from random people around the world over the internet.
What is an ICO? An ICO is a fundraising tool that trades future cryptocoins in exchange for cryptocurrencies of immediate, liquid value. ICO is used by startups to avoid the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early contributors in exchange for legal tender or other cryptocurrencies, but usually for Ethereum and Bitcoin .
As we see, both ICO and crowdfunding are the ways of attracting funds for a project development. So what are the key differences? Let’s have a closer look at different aspects.
1. Platforms
Traditional crowdfunding relies on platforms such as Kickstarter or Gofundme,,… whereas ICOs aren’t bound to any specific platform. Different crowdfunding platforms could have different purpose or approach, but overall the concept is simple – you post your project to a large group of potential investors, and they fund your project with money if they are interested in it. You can start a crowdfunding exercise for free as you will only be charged when your project has raised some funds or the full amount. Those who want to participate in ICO send money directly to a company’s address without any mediator. This may require a higher level of trust for the company that launches ICO, but, on the other hand, all interested parties are free from transaction fees (sometimes there are any) and all possible complications caused by the third party involvement.
2. Regulations
Crowdfunding platforms are registered and regulated by the law. This blooming market is expected to reach $96 bn by 2025. Hence, some governments have already come up with regulations that set requirements for crowdfunding projects and define liabilities. One of such regulations is JOBS Act, issued in the US in 2012. Before that, only qualified investors could invest in startup projects, and now any US citizen can participate in a crowdfunding projects. As for Europe, France is the only country to perform government control over crowdfunding.
ICO are usually unregulated and, as a consequence, ICO participants are subjected to some risks. Recently, there has appeared a lot of scam projects and the majority of the ICO projects aren’t regulated, investors cannot be fully protected. However, the Security and Exchange commission have recently imposed first charges on companies that went on ICO for fraud. Other risks include technical mistakes in smart-contracts that lie underneath ICO processes. Probably the most infamous example is DAO that raised raised over $150 m and lost one third of its funding due to the exploited by hackers vulnerabilities in smart-contracts. The curious fact is that Filecoin ICO became the first regulated ICO ever and raised record-breaking $252 m in less than an hour.
3. Vision
Crowdfunding projects present their vision and usually a working prototype. Actually, prototyping stage of development is integral to crowdfunding success. By taking an in-depth look at the prototyping process, entrepreneurs can make the most of their resources, maximize their funding, and have a more successful product launch. As with any product on the market, success is often dependent upon exposure. In general, journalists and reporters won’t cover a crowdfunding campaign without a prototype because they don’t want to be giving press time to vaporware – hardware and software that gets advertised but never gets made. ICO project vision is usually presented in a document called White Paper. Some ICOs have raised significant amount of money only with the idea expressed and vaguely described. That is why some investors are still wary of ICO projects and prefer to keep away altogether. Nevertheless, this approach allows to launch more startups and develop groundbreaking ideas.
The crowdfunding projects may be of any kind from tech to art projects, whereas ICO are launching blockchain-based projects, since ICO “coins” are essentially digital coupons, tokens issued on a blockchain.
4. Rewards
Crowdfunding contributors don’t expect any reward, although some may be offered as an acknowledgement. Individuals or companies who launch campaigns may compensate contributors with something like a T-shirt, a copy of whatever they’re building or even just a thank you. Or, in some cases, reward models offer the possibility to pre-order the product that the entrepreneur is making – and that’s it. ICO participants receive tokens in return according to the amount contributed. Some tokens give access to the services that platform will offer in the future. An ICO might involve attributing equity to a token so that ownership gives you voting privileges and access to dividends. However, the majority of use cases are for something different. The typical use case of a token issued in an ICO is the creation of an asset that gives you access to the features of a particular project. Instead of having cash or Bitcoin as the way to pay for goods and services from the ICO offerer, you use their token. Besides, some view tokens as an investment opportunity as they hope that the price will go up.
5. Contributors identification
As stated above the majority of ICO still aren’t regulated in any way, so there is no ICO no KYC (Know Your Customer) or AML (Anti-Money Laundering) procedures which is one of the reasons ICOs are criticized. Moreover, as far as the states with the relative regulations are concerned, governments have a legitimate reason to thwart corruption and money laundering. Taking in funds without properly performing AML/KYC checks is clearly illegal. However, some companies already provide plug-in software solutions that handle the necessary AML.
6. Value
The projects that collect their money on crowdfunding platforms may be easily compared to the similar market projects. When a product is introduced on crowdfunding platforms, investors and buyers are aware exactly what to expect when the product is complete. The projects that go on ICO usually sets the coin price themselves. It is virtually impossible to predict the outcome of an ICO, especially if users aren’t fully aware what they can expect. ICO itself is not based on any real-world market value, which thus makes it subjected to substantial under or overvaluation of assets. That means, that if a token is overvalued and token price goes down, investors will lose their money.
7. Amount of money raised
Crowdfunding has become one of the most popular ways for individuals to raise money for a cause, project, or event. There are crowdfunding platforms for every type of cause, project, event, and situation. Kickstarter, one of the largest crowdfunding platforms, have raised nearly $3 bn since it was created in 2009 for more than 100,000 projects. However, over $2 bn was raised on ICO this year by less than 200 startups!
Although ICO and crowdfunding may seem to have a similar nature at first sight, they differ in many key aspects. Traditional crowdfunding is regulated and is less risky for investors. For blockchain project ICO is a fast and easy way to raise money, although in some cases the amount of money raised may surpass the sum required to launch a project.
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Jens Ivens