The Initial Coin Offerings (ICOs), Security Token Offerings (STOs), and Initial Public Offerings (IPOs) are all fundraising mediums. Modern enterprises use them to raise capital. The raising of funds is one of the prime objectives of any startup. Thus they choose to sell blockchain-based digital assets either through ICOs or STOs. The other way is through the selling of shares in the traditional stock markets using an IPO. Let us study the main differences in ICOs vs STOs vs IPOs in the cryptocurrency market with a keen understanding of each term.
What is a Cryptocurrency token?
A crypto token is also known as a virtual token. It represents a tradeable asset or a utility used for investment purposes. It includes ICOs, for currency exchanges like Bitcoin for economic purposes. The crypto-token suits ICOs and STOs, used by blockchain enterprises for capital funding. These tokens have various functions such as enabling decentralized exchanges to sell pieces as NFTs, in the blockchain arena.
What are Smart Contracts?
Smart contracts are programs containing digital agreements stored on the blockchain. These are contracts fulfilling agreement terms written on lines of code between buyer and seller. It can include the self-executing contracts between recipient and contract creator. Smart contracts have no intermediary and provide traceable, transparent, and irreversible transactions. These are the channels, that make the ICOs and STOSs possible.
Initial Coin Offerings (ICOs)
The Initial Coin Offerings tends to be the first crowdfunding option introduced in the blockchain market. This method allowed anyone from any place to finance the company or project development. ICOs baptize the crypto version of Initial Public Offerings (IPOs). In exchange for the investment, the investors receive utility tokens or user tokens. These are the representation of future access to the company offerings.
Thus, instead of traditional equities acquisition, like company shares, the participants can buy tokens to raise the business funding. However, investors are not entitled to hold a stake. Neither can they be involved in the decision-making process, such as in IPOs. On the contrary, the investors can use the acquired cryptocurrency to fund the ecosystem. These include the traditional cryptocurrency and the Islamic Shariah-compliant cryptocurrency Caizcoin. It involves buying or selling for profitability, without any gruelling or regulative process, like in conventional IPOs. The simple procedure makes it suitable for small and medium enterprises.
Security Token Offerings (STOs)
The security token offerings (STOs) are similar to ICOs but are subject to regulatory requirements. It has surfaced in reaction to the oversight lacking in comparison to ICOs. Therefore, it brings the regulatory process to blockchain-based crowdfunding. Hence, it offers a solid guarantee in raising funds using the tokens based on the blockchain model. These tokens find their similarity with the traditional securities and are therefore known as the digital representation of asset ownership and economic rights. It offers the same rights of profit participation, along with dividends and voting in internal decisions. More often, it gives the holders entitlement to equity or ownership of assets. These include real estate, trust, LLC (limited liability companies), fine arts and other ownerships. The STOs combine blockchain with the regulations of the security markets for asset liquidity facilitation and accessibility finance. Furthermore, it promotes the regulatory objectives of securities. It includes disclosure, reliability, equality, excellence and proficiency using automation and smart contracts.
Initial Public Offerings (IPOs)
Also known as ‘going public,’ the Initial Public Offerings is when the company moves from being a private company to one listed on the stock exchange. It is deemed as one of the oldest and most popular fundraising methods. On deciding to conduct an IPO, the company sells its shares to institutional investors and trades on the stock market. The companies can raise the investment capital with an IPO by issuing new shares. Moreover, the existing shareholders can even sell their shares without raising new funds. In the crypto space, the selling of digital assets to the general public are part of IPOs. The crypto company raises funds with IPOs but has to undergo rigorous public scrutiny. Moreover, it has to meet the requirements of the authorities that look after the public listed companies.
ICOs vs STOs – Major Differences
The prime differences lie in the essence of offerings of digital assets. In an ICO, the digital assets are segmented as utilities, with an infinite issue number. Hence, these prove to be highly speculative holdings. It is because the value rises from the perceived benefits expected by the buyers instead of the actual value. These ICOs associate themselves with the pump and dump scheme, catching a red flag in the regulatory lens. On the contrary, the STOs represent the real securities, such as bonds or stock, linking with a more stable company.
In legislative terms, the significant difference is that the STOs place themselves under securities legislation, like the conventional IPOs. However, ICOs have placed themselves under utilities with a shady and less transparent system. As a consequence, STOs offer startups additional security. The token is registered and validated by the local security and exchange commission. The respective authority administers every transaction under STOs. Although the investment process gets lengthy, it is much more protected and less likely fall to scam preys.
ICOs vs IPOs – How are they different?
In general, fully established companies raise funds using IPOs, while young and zealous startups prefer ICOs for fundraising. But the main difference lies in the return the investor gets in exchange for the funding. In an IPO, the investor is entitled to the equity that is the owner of the assets. It comes along with debts and liabilities as well as voting rights in the decision-making process. Conversely, in ICO, the investors are deprived of any company equity. Neither do they have the right to vote in important decisions of the company. The coin value determines the rights represented by the token alongside the progress of the underlying project. Moreover, ICOs occur at the blockchain entity launch. while the private company decides on the launch of IPO in the latter part to turn into the stout entity, having a longstanding working product or service. Additionally, the regulation distinguishes an ICO and IPO. The ICO is self-regulated by automated and digital smart contracts. In contrast, the IPO undergoes a strict procedure, due diligence, and a rigorous compliance process, preceded by approval from the local regulatory body. The only benefit ICO enjoys over IPOs is the removal of intermediaries, which makes the process lengthy, inefficient and expensive.
STOs vs IPOs – Which one to choose?
Though the STOs and IPOs share the same fundraising aim in return to the security, they are distinguished by the processes and instruments used. Blockchain technology poses benefits to STOs, in real terms. With the automation of processes and removal of intermediaries, STOs turn out to be a more simplistic and cost-effective way. On the contrary, the IPOs require the hiring of intermediaries that remunerate. It ultimately influences the success or failure factor of offerings.
Moreover, the STOs, allows small and medium enterprises to raise capital which was not possible before the advent of crypto offerings. The blockchain and crypto marketplace is open 24/7, resulting in higher liquidity and increased trade volume. Thus, it offers an upper hand on the traditional market, which is only active during selective working hours and relies heavily on human resources. Moreover, both the IPOs and STOs, allow investors the right to obtain the company equity through dividends and voting rights. However, the financial instruments are different in enabling ownership of equity. In the IPO, the investor buys asset representation as stocks, while in STOs, the investor purchases digital tokens.
Frequently Asked Questions
IEOs, or initial exchange offerings are likely to replace ICOs. The IEO allows the developers to introduce their tokens. Therefore, it uses the current cryptocurrency exchange, instead of creating brand-new tokens amalgamated in the brand new platform.
The first-ever token sale for ICO dates back to July 2013 by Mastercoin. Ethereum raised its first revenue with a token sale in 2014, raising 3,700 BTC within 12 hours. It equated to approximately $2.3 million in 2014. Gradually, in 2017, the ICOs and token sales received worldwide popularity.
The ICO crypto offers a reasonable option for investors at low prices. It intends to grab interest before they initiate on the trading markets. Hence, most of the tokens are in high demand upon hitting the market, and investors can sell at a profit.
In the case of STOs, the tokens represent the share of underlying assets, issued on the blockchain to the accredited investors. Thus, the post offering supervision of STOs tends to be less burdensome and inexpensive compared to IPOs.