We may associate abbreviations with consensus mechanisms. Nothing could be further from the truth, however! The continuous evolution of cryptocurrencies requires the development of new methods, supporting blockchain and fundraising. Today we will discuss the basic differences between Initial Coin Offering (ICO), Initial Exchange Offering (IEO) and Security Token Offering (STO). Get to it!
Initial Coin Offering (ICO)
This is a kind of crowdfunding that uses cryptocurrencies to fund blockchain projects in their early stages of development.
How. A person, project, or investor can sell their new cryptocurrency tokens to other investors, thus obtaining funding to further develop the venture. Initial Coin Offering gained popularity in 2017.
The main goal of ICO is to raise funds, create a community and strengthen the project.
There are three main categories of tokens in ICO:
- Utility tokens (utility tokens) – provide us with access to a particular company’s platform, product, or service. As these tokens are not created as an investment, they are not subject to any regulatory restrictions in countries where ICO is allowed.
- Tokenized shares – represent our share in a company that participated in ICO. This type of token are nothing more than digital shares that give us ownership and control of a project. However, it is worth knowing that this type of token is subject to the SEC and other regulatory bodies.
- Asset-backed tokens (Asset-backed tokens) – they represent physical assets or commodities. For example, gold and oil. They are the least popular among investors because, as a rule, their value does not exceed the value of the underlying asset.
Advantages of Initial Coin Offering
- They are easy to implement. A project basically only needs a white paper, a website, and a team that supports the project.
- It has low startup costs, so it is ideal in the early stages of project development.
- In the case of ICO, fundraising is easy – all it takes is a well-thought-out strategy.
- Initial Coin Offering provides relatively high liquidity early in the project.
- The originators have full control over the funds raised.
Disadvantages of Initial Coin Offering
- Extortion and fraud are common in this type of financing.
- This is not a good investment in the long term.
How does Initial Coin Offering work?
Any cryptocurrency project that wants to raise money can launch an ICO. However, the first step to take when going for this type of funding is to determine how it will be structured. Some of the most common ways include:
- Setting a specific target or limit for financing by the company. This means that the token sold during ICO must have a predetermined price and a fixed supply of tokens.
- The amount of funds received in ICO in advance determines the price per token.
Initial Exchange Offering (IEO)
It is limited only to members of the cryptocurrency exchange and fully supervised by it. It involves a particular cryptocurrency project selling its new tokens directly to the exchange, to raise capital. For a fee, of course. The project cannot sell the offered assets to an individual. Therefore, investing in this case is not so complicated for the recipients of the project.
IEO provides almost instantaneous trading of cryptocurrencies. It is important, however, that in this type of financing, the exchange, or trading platform where one intends to place one’s assets complies with securities regulations.
Initial Exchange Offering also has three main goals: raising funds, creating a community around the project, as well as strengthening it.
Advantages of Initial Coin Offering
- We are confident that the exchange, where the IEO, takes place is verified and secure.
- Investors send their new tokens directly to the exchange. A faster and safer process.
- Instead of sending funds to the intelligent contract, they are transferred directly to investors’ accounts. Of course, after deduction of commissions by the cryptocurrency exchange / platform.
- IEO prevents fraud and scams, by funding through verified platforms.
Disadvantages of Initial Exchange Offering
- The setup and process of the entire project is more difficult.
- The cost of fundraising is higher, compared to ICO.
- Liquidity is also lower than even ICO.
How does the Initial Exchange Offering work and how to participate?
A project that wants to participate in IEO, must first register with a cryptocurrency platform that agrees to do so. Then the entire project, but also the user, goes through the required verification procedures and is qualified to take part in the process.
If you are a user, your next step is to purchase tokens on the exchange.
Security Token Offering (STO)
Very often referred to otherwise as tokenized IPO. It is the public sale of security tokens, on a cryptocurrency platform. The STO process is more complicated and time-consuming. It is also definitely more difficult to implement than ICO. STO made its debut in 2018.
A security token is a digital asset that represents an underlying, real asset such as a security. Therefore, the STO procedure enables tokenization of assets for many companies. We can confidently compare Security Tokens to certificates issued for shares. In the case of shares, any ownership information is entered into the ownership document. In the case of tokens it is the same, except that, such information is placed on the blockchain and represented by a token.
STO has slightly different goals than ICO and IEO. Its task is to build a financial instrument and raise funds. Then to reach the cryptocurrency market and create liquidity for the project.
Advantages of Security Token Offering
- It is a very trusted and safe investment tool.
- It is ideal for long-term investments.
Disadvantages of Security Token Offering
- It is quite a challenge, due to strict regulatory rules.
- Unfortunately, but it provides low fluidity.
Security Token Offering is complicated in that it must follow the law and SEC regulation. It can only exclude financial institutions and intermediaries from its process. Unfortunately, however, security tokens are subject to federal securities regulations.
Similarities between ICO, IEO and STO
In addition to the many differences, each, of the discussed ways of raising capital, has a lot in common. Let’s take a look at these most obvious features:
- All three require careful preparation before starting a project.
- A platform, or project, must have an existing community to reach its collection goal and succeed.
- The project team, no matter whether in ICO, IEO or STO, must prepare a white paper and other necessary documents.
- For the project to achieve better results, it is advisable to take advice from qualified advisors.
How do you launch your ICO, IEO or STO?
Here are a few things you need before launching your financing:
- Whitepaper, otherwise known as a whitepaper.
- His reliable and irreplaceable team.
- Find the right and specialized advisors.
- Choose your fundraising strategy.
- Create a marketing plan and strategy.
- Prepare to launch fundraising!
Summary
You already know the main differences, between the three most popular ways to raise funds. Knowing the advantages and disadvantages – which way, according to you, is the best? Share your opinion with us!