A reverse Initial Coin Offering (ICO) is the process when an established company with a well-known presence on the market creates a cryptocurrency to raise more capital.
Reverse ICOs allow companies with a proven track record to attract new customers from the crypto space while offering their old customers a new way to interact with their products. Another main reason to conduct a reverse ICO is to decentralize a company’s business using blockchain technology.
A great example of a reverse ICO is Klaytn, a blockchain launched by the South Korean technology company Kakao. Klaytn leverages blockchain technology to develop new services and improve Kakao’s business ecosystems. The platform raised $90M in token sales, selling 1.9B $KLAY tokens in April 2019.
“For companies, it is a way to raise funds without going through the traditional fundraising process, and it provides them with access to a global investor base. For investors, it is a way to invest in promising startups and companies at an early stage and potentially earn high returns on their investment.”
– Reverse ICO, FasterCapital (2024).
Retrospective For Reverse ICO
The first ever recorded reverse ICO was conducted by Ripple back in 2012. After launching its payment platform, the company launched XRP to increase cross-border liquidity and facilitate faster and cheaper financial transactions.
XRP is now used as a bridge currency within the Ripple network, enabling the instant transfer of value between multiple fiat and cryptocurrencies.
After Ripple, the concept of reverse ICO became insanely popular in 2017 during the ICO boom. Then, multiple companies have initiated the process of creating a token. Among them are IBM, Linea, and many more.
Potential Improvements for Reverse Initial Coin Offerings (ICOs)
While a great tool for raising capital, reverse ICOs have always had a few problems that left investors and companies unhappy. Here are three potential improvements for reverse ICOs:
- Community Governance: One of the main issues with companies that went through a reverse ICO is their inability to create a truly decentralized structure. Only a few big companies that issued their cryptocurrencies gave governance rights to their holders, which is a significant problem in the crypto world.
- Legal Compliance: ICOs have always had a problem with legal compliance. Ripple, for example, is still fighting the SEC to prove that its ICO (held in 2012) wasn’t illegal. It would be better for investors and companies that want to conduct reverse ICOs to invest more time and money in legal compliance.
- Continuous Improvement: Some projects and big companies (like Kodak) simply do not work on their blockchain projects after the ICO. They view it as a way of raising money, not creating a new product based on blockchain technology and crypto. This approach should be corrected.
What’s the Difference Between a Reverse ICO and a Regular ICO?
The main difference between a reverse and a traditional ICO is that existing companies with an established track record use reverse ICOs, while startups use traditional ICOs to raise capital.
This means that projects use a reverse ICO to decentralize their business and raise more capital through a token sale. The project already has a suite of products, a customer base, and a team of professionals.
For simple investors, reverse ICOs are much more secure than regular ICOs, even if they are less popular on the market.
Reverse ICO. FasterCapital. (April 7, 2024). https://fastercapital.com/startup-topic/Reverse-ICO.html
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