Modern Financing: Stock Listing vs. ICO
In this article we review some of the key arguments for and against traditional Stock Listings vs. Initial Coin Offerings (ICOs), as funding options for modern businesses.
As was mentioned in an extensive exploration of ‘Types and Sources of Long-Term Funds’ here previously, stock listings provide a great way for companies to raise finance. We often think of the stock market solely from the investors’ perspective, but it is still the case that an IPO and long-term stock listing help companies to generate capital.
A stock listing is not the only way for a company to raise investment capital however. And in addition to some of the alternatives that were also mentioned in the aforementioned piece, it has become somewhat popular of late for new companies to pursue ICOs instead. An ICO — or “initial coin offering” — is defined by The Balance as the initial release of a new asset that a company uses to raise funds. In effect, a company opting to hold an ICO is inventing its own cryptocurrency, which people can purchase as a means of investing in the company. It’s a fascinating new option, albeit controversial, and one that many new and emerging businesses have already explored.
The interesting question that some business owners have to ask themselves now is which of these options is best for modern financing.
Of the two options, the main argument in favor of an ICO is perhaps that it’s simpler. It has become a common option among new and young startups, simply because there are fewer requirements behind it. Provided some effort and investment, any company can in theory launch an ICO.
On the other hand, an IPO (initial public offering) and stock listing require a certain level of success and preparation. A write-up on the process by Inc. went as far as to call an IPO “the definitive sign of a company’s success” — conveying that it is less of a maneuver for startups and more of an advancement for existing, thriving companies. This doesn’t mean it’s not a feasible option for any and all companies that hope to make it. But at least from a standpoint of simplicity it’s somewhat less feasible than an ICO.
Convenience for Investors
There is a perception particularly among members of younger generations that an ICO offers a simpler option to investors as well. A well-constructed coin offering can be set up so that it really just takes a prospective investor a few clicks to buy in — perhaps alongside the download of a given crypto wallet and/or exchange platform. Furthermore, even some established trading platforms for futures and forex markets now offer some access to cryptos (and potentially high-profile ICOs) as well, and have become extraordinarily convenient to use. FXCM states that a single trading account can give investors access to a range of online and mobile platforms for this kind of simplified investment across markets.
All of those factors make ICO access easy for investors. At the same time however, stock investment has also been made far simpler in recent years than it ever was in the past. A lot of younger people have grown accustomed to buying into companies via trendy new apps like Robinhood and Acorns. And for that matter, plenty of trading platforms similar those alluded to above have also simplified stock trading.
At this point, it may in some cases be marginally simpler for investors to buy into ICOs. But the difference is no longer particularly significant.
The other key factor to consider in comparing the options is whether one or the other holds greater overall funding potential for modern businesses. Unfortunately, there is no conclusive answer in this regard.
Because ICOs are relatively new and trendy, you may hear from time to time about one that is particularly lucrative. Back in 2018 for instance, CNBC profiled one blockchain startup that raised $4 billion without a live product — setting a standard for ICOs and eclipsing the leading IPOs that same year. This is by no means anything close to the norm, but it does speak to the potential for a well-run ICO attached to a promising idea or company.
Ultimately funding potential is simply too difficult to compare. Many would view an IPO and stock listing as the best and most beneficial options for companies with the structure and prestige to support them. Others will highlight the booming potential of successful ICOs like the example just given.
These remain two very different financing options, typically fit for two very different types of companies. Neither is better or worse than the other. For those involved in starting a company or figuring out a next round of funding though, it’s wise to look into both options in detail.
You might also want to read: Financial Objectives for Different Entities
Pass faster. Pay less.
Study for your CIMA Objective Test and Case Study exams with the most extensive, award-winning study resources including video lectures, course notes, mock exams, and more.
Coming soon in 2022: save thousands on ACCA tuition with VIVA's All Access ACCA pass, granting you access to all ACCA subject courses, including video lectures, practice questions, live Q&As, and more.