HOW DO ICO‘S WORK?

A simplistic interpretation of the issuance of such coins, or tokens, is that they are an investment on a possible future payoff. For example, if a startup technology firm has a business plan to apply blockchain for a certain solution, say, improve the back-end of securities or payment processing, or enhance record keeping in the insurance sector, investors would purchase the tokens before such a solution is actually realized or operational. The ventures could receive the tokens for payment in future development of their business.

The tokens do not in themselves confer ownership of a stake in the business. Depending on how the deal is structured, the investment in the tokens might lead to a future share in revenues of the venture. In other cases, the investment can be compared to fund-raising or a crowd-funding vehicle, using tokens that could be redeemed for cash at a later date once the venture is successful. Since the issuance of such tokens is currently outside the scope of regulatory oversight, they are seen as a quick way in which tech startups can raise capital without all of the necessary requirements that would come with, say, an initial public offering in stocks.