A reverse initi💝al coin offe༒ring (ICO) is the idea that an established company could issue a cryptocurrency to raise lucrative amounts of capital while attracting investors worldwide, all at a very low cost. Regulatory developments have made this fundraising approach unfeasible.

A reverse ICO may still be an option for a company that decides to register its cryptocurrencies in the jurisdictions where it wants𒆙 to raise funds, but due to the legal requirements, the practice is very rare.

Goals of a Reverse ICO

At o🌺ne time, reverse initial coin offerings were used by some established companies as a way to raise funds without going through the process of registering securities. The reg💟ulator-approved method of issuing securities required much more time and costs than a coin offering did, so it was viewed as a cost-savings approach to raising capital. Companies were generally looking for way to fund new projects and access a larger investor base, seeking to expand its investor reach globally.

Another goal some companies might have had was to i𒈔ssue governance tokens, which would allow them to democratize some of their processes if desirꦍed. Additionally, they could decentralize portions of their business ecosystem for agility, flexibility, collaboration, and access input from token holders.

Reverse ICO Example

While not specifically labeled as a reverse ICO at the time it was offered, here is an example o😼f an established company offering tokens:

In 2018, the popular social media platform Telegram launched a token that raised more than $1.2 billion. In 2019, the Securities and Exchange Commission filed a lawsuit against Telegram for offering unregistered securities. In 2020, the SEC emerged victorious from the lawsuit with Telegram agreeing to repay all funds to investors.

While successful in its reverse ICO, Telegram faced backlash from regulators, and due to the refunds and fines imposed, the offering cost more than it had raised.

Reverse ICOs vs. ICO

In some cases, a reverse ICO is similar to an ICO. The primary difference between the two is that the company launching the reverse ICO project is already operating and profitable. When these issuances were popular, it was believed that an existing company offering tokens might be able to sway investors into viewing the offering as a more attractive investment than a cryptocurrency offered by a new business.

Reverse ICO Legal Concerns

Similar to many cryptocurrency issues, there are issues regarding this practice. For exampl𓆏e, most reverse ICOs were issued during the crypto and ICO bubble as scams. Naturally, this attracted the attention of regulators, who accused the issuers of offering unregistered securities.

Another concern is that while these offerings were often advertised as decentralization efforts as well as fundraisers, few companies will be fully willing to "decentralize a business ecosystem" to allow token holders to make important decisions. Most of these were quick cash grabs with promises of returns to investors via appreciation rather than payback.

The Bottom Line

A reverse ICO occurs when an existing and pro♌fitable business iss🦂ues tokens to raise funds for a project. The practice was more common during the ICO boom but is not practiced anymore due to regulatory requirements.