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Why Do Companies Use a Reverse ICO?

Although highly charged because of issues relating to scams and fraud, initial coin offerings (ICOs) remain among the most popular and important parts of the cryptocurrency boom.

Generally, a company launches an ICO when it is looking to launch. By selling tokens to interested investors in a manner similar to an initial public offering, the company generates crowdsourced funding which allows it to complete its launch process and attempt to break into a broader market. Many blockchain-related companies have launched via ICO, some to significant levels of success. Now, though, there are ways for pre-existing companies to also make use of a related model.

This process, which has come to be known as a "reverse ICO," sees a traditional business take steps to venture into the decentralized realm of the digital currency world.

Key Takeaways

  • An initial coin offering (ICO) is a way for blockchain companies to raise funds using a dedicated digital token.
  • A reverse ICO, rather than issuing tokens for a new venture, are tokens issued by an established or mature company.
  • The SEC and state regulators restrict what type of securities a company can issue and by what means, making a reverse ICO tricky for some companies.

Raising Funds to Decentralize

In some cases, a reverse ICO may look very similar to a traditional ICO. The primary difference is the company that is launching the project. Established companies can sell tokens to interested investors as a means of decentralizing, as a way to accrue additional investment, or to help launch a new, blockchain-focused branch, according to a report by Coin Insider.

Reverse ICOs can have many potential benefits. For existing companies that are already subject to regulation or which have already conducted an IPO, reverse ICOs are sometimes considered "more easily valued," according to the report. Besides this, reverse ICOs can "function with greater legal and fiscal transparency and trustworthiness," owing to the fact that a reverse ICO requires less regulatory adherence compared with an IPO.

Many IPOs are only open to accredited investors, necessarily limiting the pool of potential customers for the offering. Reverse ICOs allow companies to raise funds from among a much broader array of investors around the world. In most cases, they do not require a painstaking legal process in order to meet regulatory requirements.

What Reverse ICOs Can Do

While raising funds is a significant benefit of a reverse ICO, it is not the only reason why a company may choose to go through this process. Some established companies might launch a reverse ICO in order to set up their own economies within their product services. Consider the messaging app Kik, for instance; the company launched its own digital currency, Kin, for customers to use within its app.

For other companies, a reverse ICO can aid in the process of distribution, helping to decentralize an operation or even ownership of the company across a blockchain in a more efficient way than through an IPO.

Some of the companies that have already taken to the reverse ICO trend include established digital currency exchanges. These companies are already closely linked with the blockchain world, to be sure, but many still operate, from a business operations perspective, largely outside of that space. If an exchange launches its own cryptocurrency asset via a reverse ICO, it can become more self-reliant and autonomous. It can also provide customers with an added incentive to conduct their digital currency transactions with that particular exchange as opposed to a rival.

To be sure, reverse ICOs remain a fairly rare phenomenon at this point. Generally speaking, many mainstream companies have been resistant to dive headfirst into the cryptocurrency world. However, particularly if ICOs continue to be seen as carrying the potential for lucrative rewards for companies, it may only be a matter of time before the reverse ICO as a trend begins to take off.

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Spotlight on Initial Coin Offerings (ICOs)."

  2. U.S. Securities and Exchange Commission. "Accredited Investors – Updated Investor Bulletin."

  3. Kik. "Introducing Kin."

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