link to previous article on how to get started with cryptocurrency - https://steemit.com/steemit/@cryptobanyan/ico-investment-series-1-where-and-how-to-buy-cryptocurrency-to-start-with
Each topic that I touch upon can be very detailed and complex. Where possible I give links that help give deeper details. I refrain from any deep discussions because of 2 simple reasons - 1. I am not authority on these topics, but more importantly 2. I want to cover a broader perspective of ICO investments and any deep discussion will take us away from our goal.

What is an ICO

First - Why you need to know

Other than purely for gaining some knowledge, you want to know about ICOs only if you are interested in investing money or participating in them in some way. ICOs are risky investments and given that not many are turning profitable on exchanges these days, it is better to do your due diligence on ICOs. So lets get started!

Brief on cryptocurrency and popular coins

Cryptocurrency is a digital or virtual currency that use cryptography for security and safeguarding your ownership of them. These cryptocurrency coins can be accepted as payment like any fiat currency (if the local law permits to do so). The first such cryptocurrency was bitcoin. Post bitcoin there have been many other coins that either made some modifications to bitcoin technology to offer some improvements or launched their own blockchain code from scratch. These coins are called altcoins (an alternative to bitcoin).

• Of the many altcoins that copied the bitcoin technology and propose to offer improvements, the most popular one is Litecoin.
• Of the many altcoins that have launched their own blockchain from scratch, the most popular ones are Ethereum, Ripple, Stellar Lumens, Cardano (ADA), EOS
• For both above categories, many folks may find other coins as more popular and in demand and they may be just right. I just noted a few that came to my mind.

The link below is one of the easiest one for a new person to understand about coins, altcoins, tokens etc.
https://masterthecrypto.com/differences-between-cryptocurrency-coins-and-tokens/

So what really are ICOs?

ICO is an abbreviation for Initial Coin Offering.

• A startup on the blockchain issues coins or tokens to investors in exchange of fiat (currency, usually USD or Euro), bitcoin or Ether and lately NEO (NEO is one of the later entrants into cryptocurrency, but I hear it is growing faster than the former two, so newer startups are launching on its blockchain).

• The coins offered by the startups either act directly as cryptocurrency or as some kind of tokens that fuel the startups application on the blockchain. Investors are buying these coins / tokens in the hope that either the coin becomes a mainstream cryptocurrency due to benefits it offers over existing cryptocurrencies or as more users line up to use the startups applications, the usage of the tokens will increase and hopefully so will their price.

• Though the process of raising funds by blockchain startups in this manner is called ICO, lately the community around these startups is make clear distinction of whether what is being offered to investors is a coin or a token. This aspect is also very important. You may end up with terms like ICO or Token launch and you will immediately know which is which. I do caution though that most token launches are still being referred to as coin offerings and that may cause some confusion.

Some links below that give a much detailed and better understanding
https://www.investopedia.com/terms/i/initial-coin-offering-ico.asp
https://www.marketwatch.com/story/what-are-icos-and-why-is-the-sec-taking-steps-to-protect-investors-from-them-2017-07-27
https://blockgeeks.com/guides/initial-coin-offering/

More on token generation

The most popular blockchain for token generation is Ethereum (though NEO is slowing gaining popularity, but still very nascent when compared to use of Ethereum blockchain). Ethereum provides smart smart contracts, which has made token generation an easy affair and startups wanting to implement their projects over the blockchain, do not need to create their own blockchain by copying bitcoin code or creating one from scratch. They may just use the underlying blockchain like Ethereum and use its smart contracts for token generation and distributing tokens to investors. They also use the underlying blockchain to run the transactions for their applications.

What are smart contracts

The market for ICOs has exploded when Ethereum introduced the smart contracts. Smart contracts are self executing code that do not need a third party intervention. These codes can execute when some condition is met. Startups are using the smart contracts to power their applications on existing blockchains (Ethereum, NEO etc), so they do not have to build a complete blockchain just for their application. Their application works on top of one of the existing blockchains. First they use a smart contract that takes your native cryptocurrency of the blockchain (Ether, Neo) and in return gives you a coin / token that conforms to a standard of the blockchain in operates on (ERC-20 or NEP-5 standards). These coins / tokens can then be used to own the assets of the startup or have access to the applications / products being offered by the startup on the blockchain.

If you must really know more about smart contracts, then google it or click below links and read about it.
https://blockgeeks.com/guides/smart-contracts/
https://www.draglet.com/why-ethereum-icos

Types of ICOs - What are you really getting when you buy a coin or token

There are many types of ICOs that are being conducted and all are not equal in terms of what they offer.

Coin offerings

• Coin offerings are often tied to bitcoin and called a bitcoin thing.
• If the startup is offering a coin like bitcoin (called altcoin) then it is called coin offering. These coins use the code of bitcoin and make some modifications to it.
• These coins have only one function, and that is to act as a digital currency secured by using cryptography tools.
• These coins either need to be mined or they are already created for you and offered to you in an ICO.
• The blockchain uses Proof or Work algorithm to verify the transactions / transfer of the coins and since the ecosystem is decentralised the proof of work is carried out by different computers attached to the blockchain. These computers spend their electricity the computing power for Proof of Work algorithm and therefore they need to be paid, and the payment being coins that are mined (and / or an additional transaction fees like in the case of bitcoin).
• If you need to launch your own coin, then you need to either create a blockchain from scratch or you may just copy and one of the existing open source code (depending on their open source licensing policy).
  *Examples of some existing coins that have used bitcoin technology to launch new coins are Litecoin, Namecoin, Dogecoin etc.
  In short the coins offered can be used only as digital currency and do not serve any other purpose. Maybe if there are more single function cryptocurrencies that are developed from scratch and they do not use bitcoin technology, they may still be called as coin offerings.

Token offerings

• Some of the newer Blockchains post bitcoin have smart contracts. Their offerings are called tokens as they have more functionality than just act as digital currency.

• Some examples are Ethereum, Ripple, Cardano (ADA). Since they offer more than just a currency functionality, they are referred to as tokens.

• Tokens are said to be more of an Ethereum thing due to smart contracts being used for token generation and tokens having multiple functionalities (acting as cryptocurrency may or mayn’t be one of them). These days startups are offering tokens on NEO as well. I would understand that any blockchain with smart contracts can allows token offering (Ethereum and NEO being the prime ones for now).*

  • Tokens #1 - I will call these cryptocurrency tokens - The startup is offering you a cryptocurrency on a new blockchain and they plan to support complex features like smart contracts on their blockchain and provides many enhancements to both bitcoin and Ethereum to improve scalability, security and other such issues. Since their blockchain is still being developed, they are offering you a token that is compatible with one of the existing blockchain whose smart contracts they use to exchange the coin with you for your native coin. These tokens are ERC20 compatible if launched on Ethereum and NEP5 compatible if launched on NEO. Once the startups blockchain is fully functional and ready for public launch they will somehow transfer these coins to their own blockchain. Examples EOS, Zilliqa, Credits, OMNI, etc.
    In short these are temporarily in this space and soon will be fully functional coins / tokens on their own blockchain..
  • Token #2 - I will call these Application tokens - Many startups are building their applications to benefit from blockchain technology or are porting their existing applications to blockchain technology. The startup is not planning to build a blockchain for its business. Instead it is using an existing blockchain like Ethereum or NEO to offer tokens (or for that matter using any blockchain that also offers smart contracts, for example we are already seeing 2 ICOs on Cardano). The token has multiple functions and each one differs on what they offer, but overall the token gives you some form of ownership to some underlying asset of the startup. For example the token fuels the application / product and is like a key to start using the application. More folks needing access to the application / product will need more tokens and if tokens are limited then their price will go up.
    • These tokens need to be generated for the investors and therefore often called token generation event (TGE).
    • There are typically 3 types of tokens depending on what they offer the investors in terms of underlying assets.
      • Equity token
      • Security token
      • Utility token
        The above 3 types are currently not legal classifications. Laws and regulations are currently being drafted or in process of implementation. With regulations being worked upon to classify these tokens legally, it is important to understand the type of token you are buying. For example SEC is trying to get all cryptocurrency trading exchanges under its regulations. Also they are defining security tokens vs utility tokens. Others countries are doing similar things. If tokens you buy are classified as security tokens then the laws for securities will apply. I understand that if you end up with utility tokens, then the least regulations may apply. This is a complex space and anything I state may just be wrong. Please do your own detailed research on token types.

Some links are given below that detail token types.
http://strategiccoin.com/3-types-ico-tokens/
https://medium.com/@bonpay/security-tokens-vs-utility-tokens-1aa7531aabe8

Additional resources to help you understand ICOs and what they offer.

https://masterthecrypto.com/crypto-ico-vs-stock-ipo/
https://hackernoon.com/ripple-xrp-coin-review-6b13b7b19c13
https://www.coinstaker.com/initial-coin-offering/