Crowdfunding is fast becoming a staple in the ever-evolving blockchain sphere. The emergence of Initial Coin Offerings (ICO) and Security Token Offerings (STO) have both facilitated the growing demand for crowdfunding opportunities, for businesses and investors alike. In fact, ICOs and STOs have diversified the investment opportunities in the crypto-world to unprecedented levels. Profits from ICOs and STO’s collectively already number in the billions, with growth levels set to soar as blockchain technology continues to be implemented worldwide.
While both ICOs and STOs have garnered significant investment success, some key differences have been the subject of fierce debate. Many blockchain proponents think that STO’s are the way of the future as they legitimise the premise on which ICOs are based. Others, however, believe that the flexibility of ICOs makes it a more cost-effective and accessible crowdfunding method. While both means can co-exist, it’s widely assumed that one will eventually come out on top. So what are the advantages and limitations of each approach and how do you begin to decide which one is more suited to your needs?
ICO- The Basics
ICO is the original crypto fundraising method and functions in a relatively unregulated environment. An ICO mirrors an IPO in the financial sector and is useful for companies who are launching a new product or service and looking for external investors to fund their project. In exchange for their support, the user receives a fixed amount of cryptocurrency tokens which are unique to the company. Users that back an ICO project do so in the belief that the token will increase in value. This is how profit and value are derived.
Once an ICO is conceptualised, a company must complete a whitepaper proposal that outlines the purpose, cost and projection of the project. This whitepaper also includes specific information about the token like the acceptable currencies, amount of crypto tokens to be sold in the ICO and allocation of the remaining tokens. ICOs use marketing strategies to amplify the project and attract investor attention.
When the necessary amount of investor funding is reached, the ICO is launched, if investors are not initially interested in the ICO, marketing measures can continue until the desired amount is reached.
- ICOs are a utility token, this means that users invest in the purported utility of a product or service
- There are no entry requirements, making the upfront process easier
- Investor risk remains high as there is no guarantee that products will be finalised and finished as stated in the whitepaper
- Digital marketing approaches like websites, social media and online campaigns are the most effective way of attracting interest
- High liquidity for investors is possible if ICO rises in popularity
STO- The Basics
STOs are cryptographic security tokens that derive their value from external, tradeable assets. A real alternative to private equity structures, STOs are ground-breaking as they exist in the decentralised, secure blockchain environment. STOs are backed by a tangible asset, qualifying them under the Howey test to be a verifiable security token. These regulations fall under international trade and financial laws that provide the investor with increased protection and security.
STOs are a financial instrument that has an intrinsic monetary value. They are a way to own part of a company without actually taking it into your control. An STO can generate profit, pay dividends and invest in other tokens.
This makes STOs a safe, secure way to gain investor interest in your business and generate a short-term profit injection. This is designed as a way that enables you with the tools and time to realise your companies potential.
STOs are revolutionary as they exist under governmental regulation. Many blockchain advocates point to the unification of blockchain projects and governing bodies under STOs as an example of how blockchain technology can overcome regulatory challenges.
- Only accredited investors can participate in STOs
- STOs are backed by real-world assets like real estate, precious metals, art, venture capital funds or stable coins
- Legal representation is usually required for companies looking to launch an STO, this can be expensive but also minimises the chance of fraudulent investors
- STOs are registered with the SEC (Securities and Exchange Commission)
- Despite initial hesitations, once set up and marketed correctly STOs can be easily exchanged on your chosen platform
- An STO represents the ownership of investment information that is then stored on a blockchain making it decentralised and completely secure
STOs emerged, in part, as a response to the lack of regulatory guidelines of ICOs. The framework of ICOs is focused on it as a method for usage as opposed to direct investment. This allows some ICOs to bypass legal considerations and become the home to fraudulent activity. This is exacerbated by the lack of entry barrier to ICOs.
In addition to instances of fraud and deception, there lies the fact that many ICO tokens function in a pre-sale environment, where completion and functionality of a project are not guaranteed. In more cases than not, the token’s utility is hypothetical as a company needs the user interest to build or create the protocol in question.
This makes ICO investment precarious as there remains considerable uncertainty in the market. To add to this, in early 2018, tech giants like Facebook, Google and MailChimp banned ICO related ads. Crypto reputation management went into overdrive, paving the way for a more secure and reliable crowdfunding method.
In comes STOs, the supposed answer to regulatory questions that ICOs posed. Where ICOs and STOs converge are in the fact that they are both a crowdfunding offering made by a business whereby consumers purchase crypto-tokens built on a blockchain system.
Where the two diverge as Cointelegraph state, is in the fact that ICOs sell coins, currencies and utilities whereas STOs deals with the sale of asset-backed securities.
The most significant difference between ICOs and STO, is in the regulation that underpins the STO model. STOs are a public offering made to accredited investors. Potential investors must verify their accreditation before taking part in an STO. The lower entry barrier for ICOs, however, means that there are no regulatory consequences for funds that are lost.
STO’s are increasingly viewed as a safer or lower-risk investment because they are backed by security laws and regulations that enforce transparency and accountability. STO’s are also based on real-world assets which makes assessing and tracing their value more feasible. ICOs are based on utility tokens which can be difficult to measure the true value of the token.
Compared to traditional financial methods such as IPOs, an STO can be relatively cost-effective as blockchain technology eliminates the need for intermediaries such as banks. Smart contracts also reduce the associated legal costs and automate the process to make it faster.
While STO’s still face challenges from regulators and administrators, it is generally agreed to be a much more secure type of investment. While the profits from STOs remain tiny when compared to the billions raised from ICOs, STOs reduce the risk of fraudulent activity and lost funds. STOs also offer fractional ownership opportunities and 24/7 trading and as a result, increased liquidity.