FUNDAMENTALS OF CRYPTO
What Is a Crypto ICO (Initial Coin Offering)?
In traditional finance, companies raise capital by issuing shares to the public through an Initial Public Offering (IPO). In cryptocurrency, projects raise capital by issuing tokens to the public through an Initial Coin Offering, or ICO. The parallel is intentional and the mechanics are similar in concept, but the regulatory environment, the risk profile, and the history of outcomes are fundamentally different.
Understanding what an ICO is, how the fundraising model works, why the 2017 ICO boom ended the way it did, and what the current landscape of crypto fundraising looks like is essential knowledge for any investor who encounters early-stage cryptocurrency projects and wants to evaluate them with clear eyes.
ICO Explained
An ICO is a fundraising mechanism where a cryptocurrency project sells a newly created token to early investors in exchange for established cryptocurrencies, typically Bitcoin or Ethereum, or sometimes fiat currency. The funds raised are used to develop the project, and the token is intended to have utility within the project’s ecosystem once it is built.
The process typically works as follows. A team with a project idea publishes a whitepaper describing the project, its technology, its intended use case, and its tokenomics. The whitepaper outlines how many tokens will be created, how they will be distributed, what portion will be sold in the ICO, and what the funds will be used for. A sale period is announced during which investors can send cryptocurrency to the project’s address and receive the new token in return at a defined rate. After the sale closes, the project team uses the raised funds to build what was described in the whitepaper.
The critical distinction from a traditional IPO is that ICO tokens are not equity. Buying an ICO token does not make you a shareholder in the company. You do not receive dividends, you do not have voting rights over the company’s decisions in the traditional corporate sense, and you have no legal claim on the company’s assets if it fails. What you receive is the token, which has value only to the extent that the project is built, adopted, and the token has genuine demand within it.
The History of ICOs: The 2017 Boom and Bust
To understand the current landscape of crypto fundraising, it helps to understand what happened during the 2017 ICO boom, which represents the most significant period of ICO activity and the most instructive case study in what can go wrong.
The period between 2016 and 2018 saw an extraordinary wave of ICO activity, driven by several converging factors. Ethereum’s smart contract infrastructure made it trivially easy to create and distribute new tokens using the ERC-20 standard. Bitcoin and Ethereum had appreciated dramatically, giving holders significant capital to deploy. Retail enthusiasm for crypto was at an early peak. And regulatory frameworks for ICOs were largely absent, meaning projects could raise capital with essentially no oversight or investor protection requirements.
The results were predictable in hindsight. Billions of dollars were raised by projects with nothing more than a whitepaper, a website, and a compelling narrative. Some projects raised funds explicitly intending to defraud investors, as covered in our Ponzi schemes in crypto resource. Others were genuinely attempting to build something but lacked the technical capability, the business acumen, or the team quality to deliver. A significant number of projects simply failed in the normal way that most startups fail: the technology was harder than anticipated, the market didn’t materialise, or the competition was more established.
The outcome: the vast majority of 2017 ICO tokens declined 90% to 100% from their peak values. Many projects shut down entirely. Regulatory actions followed in multiple jurisdictions as securities regulators determined that many ICO tokens were effectively unregistered securities offerings. The US Securities and Exchange Commission brought enforcement actions against numerous ICO issuers. ASIC in Australia issued guidance clarifying that many tokens would be classified as financial products requiring regulatory compliance.
The 2017 ICO boom created enormous wealth for some early participants and enormous losses for the majority. It also created the regulatory scrutiny and investor wariness that has shaped all subsequent crypto fundraising models.
How ICO Tokenomics Work
The tokenomics of an ICO, how the token supply is distributed, what portion is available in the public sale, and what the market capitalisation implies at the ICO price, are among the most important factors for investors to evaluate before participating.
A typical ICO token distribution allocates percentages of the total supply to different stakeholder groups. A common structure might allocate 40% to public sale participants, 20% to the founding team (with a vesting schedule), 15% to early investors who participated in private funding rounds before the public ICO, 15% to an ecosystem development fund, and 10% to advisers and partnerships. These percentages vary significantly by project.
The vesting schedules applied to team and investor allocations are critical to understand. If the team holds 20% of total supply with no lock-up or vesting, they can sell their entire allocation immediately after the token lists on an exchange, creating significant selling pressure at exactly the moment retail buyers are most enthusiastic. A vesting schedule that releases team tokens gradually over two to four years aligns the team’s incentives with the long-term success of the project and protects public sale participants from immediate insider selling.
The implied market capitalisation at the ICO price also requires careful evaluation. If a project sells tokens at a price implying a fully diluted market capitalisation of $500 million AUD for a project that has no product, no users, and no revenue, the valuation is purely speculative and requires the project to achieve something significant just to justify the ICO price, let alone generate a return.
ICO vs IDO vs IEO: The Evolving Fundraising Landscape
The failures and regulatory scrutiny of the 2017 ICO era led to the development of alternative fundraising models that address some of the original ICO’s problems. Understanding the current landscape requires distinguishing between these models.
IEO (Initial Exchange Offering). An IEO conducts the token sale through a centralised exchange rather than directly. The exchange acts as an intermediary, conducts some level of due diligence on the project, and lists the token immediately after the sale on its platform. Major exchanges including Binance Launchpad and Coinbase have operated IEO platforms. The exchange’s involvement provides a layer of vetting absent in direct ICOs, and immediate exchange listing removes the uncertainty of whether the token will be accessible after the sale. The tradeoff is that IEO allocations are typically available only to exchange users and often heavily oversubscribed.
IDO (Initial DEX Offering). An IDO conducts the token sale through a decentralised exchange or a dedicated launchpad protocol built on a blockchain network. IDOs are permissionless: anyone with a compatible wallet can participate without approval from a centralised gatekeeper. Liquidity is typically seeded directly on the DEX at the time of the sale, enabling immediate trading. The absence of a vetting intermediary means IDOs carry similar due diligence requirements to original ICOs.
SAFT (Simple Agreement for Future Tokens). A SAFT is a legal agreement used in private fundraising rounds before a public token sale. Accredited investors provide funding in exchange for the right to receive tokens when the network launches. SAFTs were developed as a framework for complying with securities regulations in private fundraising while preserving the ability to eventually distribute tokens publicly. They are not a public fundraising mechanism in themselves but a tool used in the private investment rounds that precede many public token sales.
Launchpads. Dedicated launchpad platforms like Polkastarter, DAO Maker, and others conduct token sales on behalf of projects, typically requiring participants to hold the launchpad’s native token to gain access to allocations. Launchpads conduct varying levels of project due diligence and provide project discovery services to their user communities.
How to Evaluate an ICO or Token Sale
For investors considering participation in any token sale, the due diligence process is more demanding than for established assets with track records, and the failure rate demands appropriate scepticism.
Read the whitepaper critically. As covered in our what is a crypto whitepaper resource, the whitepaper is the primary document describing a project’s thesis, technology, and plan. Evaluate whether the described problem is real and significant, whether the proposed solution is technically credible, and whether the token has a genuine role in the solution or is simply a fundraising vehicle. Vague language, implausible claims, and the absence of technical specificity are warning signs.
Evaluate the team. Who are the people behind the project? Do they have verifiable identities and track records? Have they built and delivered on prior projects in blockchain or relevant adjacent industries? Anonymous teams are a significant red flag for projects asking for significant capital, as covered in our security red flags in new crypto projects resource. Verifiable LinkedIn profiles, prior work histories, and reputations in the blockchain or technology community provide confidence that the team exists and has the capability to deliver.
Assess the tokenomics. What is the total supply? What is the allocation to the public sale versus team, investors, and ecosystem? What are the vesting schedules for insider allocations? What is the implied market capitalisation at the sale price? Is the token genuinely necessary for the project’s function or is it a superfluous fundraising mechanism? These questions, covered in our what is tokenomics resource, are the foundation of token sale evaluation.
Check the code and audit status. Is the token smart contract audited? Is the audit from a reputable firm and is the full audit report publicly available? Is the contract code verified on Etherscan? Unaudited contracts or audits from unknown firms are meaningful risk signals.
Evaluate the competitive landscape. Does the project solve a problem that existing solutions already address? What is its credible differentiation? What is the addressable market? A project entering a crowded space with a marginal improvement and no competitive advantage is unlikely to generate the adoption needed to justify its token valuation.
Apply DYOR rigorously. As covered in our DYOR and how to identify promising crypto projects early resources, the depth of independent research required for token sale participation is significantly greater than for purchasing established assets. The base rate of failure is high. The standard of due diligence should reflect that.
The Regulatory Position in Australia
The regulatory treatment of ICOs in Australia is governed primarily by the existing financial services framework, applied to cryptocurrency tokens based on their economic substance rather than their technical form.
ASIC’s position, developed through guidance issued since 2017, is that many ICO tokens will constitute financial products under the Corporations Act, specifically managed investment scheme interests, derivatives, or securities, depending on their structure. A token that gives holders rights to profits, dividends, or participation in a common enterprise is likely to be a financial product requiring the issuer to hold an Australian financial services licence and comply with disclosure requirements.
Tokens that are purely utility tokens, providing access to a service with no financial return expectation, occupy a different regulatory position, but the boundary between utility and financial product is not always clear and has been the subject of ASIC guidance and enforcement attention.
For Australian investors participating in ICOs from overseas projects, the token’s legal status in Australia may differ from its status in the issuing jurisdiction. As covered in our AUSTRAC and your privacy and KYC resources, regulatory compliance is an active and evolving area that investors should monitor.
Tax Treatment of ICO Participation in Australia
Participating in an ICO has specific tax implications for Australian investors under the ATO’s treatment of cryptocurrency as a capital asset.
When you send Bitcoin or Ethereum to participate in an ICO, you are disposing of that cryptocurrency in exchange for the new token. This disposal is a capital gains tax event on the Bitcoin or Ethereum sent: any gain above your cost base in those assets is assessable. The new token is acquired at its AUD value at the time of receipt, which becomes its cost base for future capital gains tax calculations.
If the ICO token subsequently rises in value and you sell it, capital gains tax applies on the gain above the ICO acquisition cost. If it falls in value and you sell, you have a capital loss that can offset capital gains elsewhere in your portfolio, as covered in our how to report crypto losses for tax purposes in Australia resource.
If an ICO token you purchased becomes worthless and effectively zero, specific conditions must be met for the ATO to allow a capital loss treatment. Our cryptocurrency tax Australia and ATO crypto reporting resources provide the framework, and professional tax advice is recommended for any significant ICO participation.
The Current Landscape: Are ICOs Still Relevant?
The original ICO model of the 2017 era has largely been replaced by more structured and regulated fundraising mechanisms. Most legitimate blockchain projects now raise initial capital through private funding rounds from institutional cryptocurrency funds and venture capital firms, conducting public token sales only after product development has advanced, typically through IEO or IDO mechanisms that provide more structure and vetting than the original ICO model.
This shift has several implications for retail investors. The most advantageous early-stage pricing is now typically reserved for institutional and accredited investors in private rounds. Public sale participants receive tokens at prices that already reflect significant appreciation from the earliest funding rounds. And the due diligence burden remains high regardless of the fundraising mechanism used.
The altcoin market continues to include many tokens that originated through ICO or similar mechanisms. Evaluating these tokens as they trade on secondary markets requires the same researching altcoins and DYOR frameworks as evaluating any other altcoin investment.
Key Takeaways
An ICO is a token fundraising mechanism where a cryptocurrency project sells newly created tokens to early investors in exchange for established cryptocurrencies or fiat. ICO tokens are not equity: they provide no direct claim on the issuing company’s assets or profits. The 2017 ICO boom resulted in billions raised, the vast majority of tokens declining to near zero, and significant regulatory scrutiny in Australia and globally. Modern alternatives including IEOs, IDOs, and launchpad sales address some of the original ICO model’s problems but retain significant risk.
Evaluating any token sale requires rigorous due diligence across the whitepaper, team credentials, tokenomics, smart contract security, competitive landscape, and regulatory status. Participating in an ICO by sending Bitcoin or Ethereum triggers a capital gains tax event on the sent asset and establishes the cost base for the new token. The base rate of failure for early-stage token projects is high, and position sizing should reflect that reality.
For everyday investors who want to understand how to evaluate early-stage cryptocurrency projects and navigate the token sale landscape with genuine due diligence skills, our Runite Tier Membership provides the education and frameworks to develop that capability properly. For serious investors who want personalised guidance on early-stage project evaluation, portfolio positioning, and managing the specific risks of token sale participation, our Black Emerald and Obsidian Tier Members receive direct specialist support.
Find out more at shepleycapital.com/membership.
WRITTEN & REVIEWED BY Chris Shepley
UPDATED: MARCH 2026
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