Comparing the Advantages and Disadvantages of ICOs with IPOs

With the increasing public attention on the dramatic rise and fall of crypto assets prices such as Bitcoin, it can be said that crypto assets have gained widespread acceptance as a form of asset management. Indeed, the level of enthusiasm one can have for it may vary from person to person, given the potential for both high risk and high return. However, anyone with an interest in investing is likely to be at least somewhat interested in owning crypto assets.

However, crypto assets is not only used to acquire existing assets for investment, but can also be issued by individuals themselves to raise funds from others. Raising funds in exchange for currency using crypto assets is referred to in IT terms as an ICO (Initial Coin Offering). One could argue that what sets crypto assets apart from existing technologies like electronic money is its ability to enable this new method of fundraising, known as an ICO. This new technology of crypto assets presents a new way of fundraising to society. For this reason, it has the potential to greatly influence the existing financial industry, giving rise to both high expectations and concerns.

Commonalities between IPOs and ICOs

So, what exactly is the process of “issuing your own crypto assets” and “raising funds using crypto assets”? In fact, this is a process very similar to the existing IPO (Initial Public Offering, also known as a stock market launch). Detailed explanations of IPOs can be found in other reference books or more detailed websites, but having a basic understanding of IPOs can make it easier to understand ICOs. By comparing with IPOs, we can see the commonalities and differences, and understand that the advantages and disadvantages of ICOs are mostly two sides of the same coin.

If we talk about the commonalities between ICOs and IPOs, the first point to note is that they are both means of raising funds for entrepreneurs. For example, in the case of launching a new business, it goes without saying that a large amount of money is usually required. No matter how full of dreams and hopes the plan may be, if there are not enough funds to realize it, it could end up being nothing more than a pipe dream.

IPOs, to put it very simply, are a way of raising funds by circulating shares that represent a part of the company’s asset value in the trading market. If many investors see potential in the company’s business, the market value of the shares will naturally increase, and the company will be able to obtain the funds to make the business a reality.

On the other hand, ICOs are conducted by companies issuing new crypto assets for fundraising, called tokens. The expectation of an increase in the value of the crypto assets as the business grows is exactly the same as the relationship with the shares of a listed company.

Who are the experts in IPOs and ICOs?

Raising funds through an Initial Public Offering (IPO) implies that the company will become a publicly listed entity. Consequently, it also means that the company will need to maintain a certain level of social credibility. Due to this reason, an IPO can only be realized after passing stringent examinations by the Financial Services Agency, securities companies, and stock exchanges.

Typically, support for a company’s IPO is considered the specialty of auditing firms and certified public accountants. The reason for this is that the perspective of a professional in accounting audits is useful in overcoming the various rigorous examinations required for an IPO.

On the other hand, Initial Coin Offerings (ICOs) do not require stringent examinations or complicated procedures like IPOs. Rather, one of the advantages of ICOs is that anyone can quickly execute them with a sense of speed.

However, just because ICOs do not require the complicated procedures of traditional IPOs, it does not mean that knowledge of administrative procedures and legal knowledge are unnecessary. For example, if the tokens issued by a company fall under the category of “virtual assets” under the revised Japanese Payment Services Act, it is necessary to register as a virtual assets exchange operator. Even if it does not fall under virtual assets, if it is considered a prepaid payment method like electronic money, obligations may arise to notify in advance or to deposit a security deposit with the country (deposit). In other words, even if the time and cost involved in the procedures can be kept small, it does not mean that anything goes. In this sense, IPOs, where legal regulations clearly exist and problems do not arise as long as you proceed on the so-called “rails”, can be said to be “safer”.

Because there is no law directly regulating ICOs, it tends to be difficult to distinguish between what is legal and what is illegal, and it becomes even more important to interpret the law based on principles.

Benefits of ICOs

With the above in mind, let’s organize the advantages and disadvantages of ICOs. First the benefits from a management perspective will be listed.

Benefit 1: Easy procedures and cost reduction

Since there is no need for a review by the Financial Services Agency, securities companies, and stock exchanges, the procedures are easy and the cost of hiring an accountant can be reduced.
→ This leads to the benefit of reducing economic costs and allowing anyone to implement it with a sense of speed.

Benefit 2: Fundraising without transferring control

While stocks are tied to company control, ICOs allow for “fundraising without transferring control”.
→ The fact that shareholders have control of the company is stipulated by the Japanese Companies Act, but since crypto assets do not have such a system, there is room for individual and free design. However, “not transferring control of the company” means that unless it is judged that “there is value in investing in the ICO even if you cannot gain control”, it will be difficult to gather investments. It can be said that it is necessary to create a “benefit” for investors in the individual and free design.

Benefit 3: No need to conduct at the company level

It is not always necessary to conduct it at the company level, and it can also be conducted at the “business unit” level or by “non-consolidated multiple companies” (however, there are not many cases conducted by non-consolidated companies in practice).
→ While stocks correspond one-to-one with the control of a specific company, since crypto assets do not have such a system in the background, there is room for individual and free design.

Disadvantages of ICOs

On the other hand, the following can be considered as disadvantages of ICOs.

Disadvantage 1: Not yet mainstream

Compared to those who invest in stocks, fundraising through ICOs is not yet mainstream, and there is a limit to the amount of funds that can be raised.
→However, considering the advantage of being able to execute with a sense of speed, it can be said that it is important to focus on marketing (such as using the Web) to attract public attention.

Disadvantage 2: Suspected of being fraudulent

Because there are many cases that are close to “fraud”, there is a certain degree of caution, which limits the amount of funds that can be raised.
→The fact that anyone can carry out an ICO without having to overcome strict audits and complicated administrative procedures can also be said to be a convenient setup for fraudsters. From the perspective of investors, whether each project and the person conducting the ICO is trustworthy is left to their own judgment, so it can be said that there is a certain risk associated with ICOs for investors.

Disadvantage 3: Few past examples

Even when looking at society as a whole, there is still a lack of accumulation of past examples, and it is difficult to design legally just by imitating orthodox examples from other companies.
→It is important to make individual inquiries and negotiations with related agencies such as the Financial Services Agency, based on knowledge of related laws and regulations, regarding the operation of laws and regulations.

Summary

As we have reiterated, one of the major appeals of ICOs is the ability to avoid being overwhelmed by complex procedures. However, it is also crucial not to misunderstand this as “the law is not strictly enforced = even lawless behavior is tolerated”. The ability to omit complex procedures also means there is a risk of inadvertently engaging in illegal activities. Even if the implementation is an ICO, it is important to remember that, from a different perspective than an IPO, a legal viewpoint is still necessary.