As blockchain continues to disrupt various global markets, it’s easy to see that this technology has revolutionized standard practices in the world of business. Along with the rise and popularity of blockchain come new ways for projects to raise money. Three of the most popular methods include ICOs, STOs, and IEOs.
While these financial vehicles have similarities, they have their differences as well. Read on for a quick and simple explanation about ICOs, STOs, and IEOs, and untangle the alphabet soup of these offerings.
| ICO | STO | IEO | |
|
What is it? |
Fundraising through token or coin |
Fundraising through an asset-backed token or coin |
Fundraising through offering a token or coin via an exchange |
|
Set-Up |
Easy |
Difficult |
Moderate |
|
Cost |
Low |
High |
Medium |
|
Regulation |
Low |
High |
Moderate |
|
Liquidity |
Medium |
Low |
Medium |
|
Protection for Investors |
Low |
Low |
Moderate |
|
Accessibility |
High |
Low |
Moderate |
It All Started with ICOs
Initial coin offerings, or ICOs, got their start in 2014. This was viewed as a way to raise funds that didn’t require using the traditional methodology of going the venture capital route. Through an ICO, investors receive project tokens in exchange for their investments. At the time, using an ICO offered an advantage of lower capital requirements upfront plus significantly reduced overhead.
Though the ICO rose to the top of the blockchain world quickly, its success is now on a downward trajectory.
While ICOs brought relevance and attention to the digital asset economy, they have experienced their share of problems. Many exit scams, fake token sales, and questionable legal practices have resulted in investors losing confidence in ICOs as a way to raise money.
STOs Aimed at Regulatory Compliance
As the ICO market dwindled, security token offerings, or STOs, stepped in as a viable alternative. With an STO, investors receive security tokens, which are kept on the blockchain. The difference between an STO and an ICO is that security tokens are backed by an underlying asset. These assets hold some form of financial value in the real world.
The benefit for investors with an STO is the increased security and higher level of transparency through the fundraising process. This is primarily due to the guidelines and regulations by which STOs must abide. Most notable among regulatory bodies are the Swiss Financial Market Supervisory Authority (FINMA) and the US Securities and Exchange Commission (SEC).
Unfortunately, STOs come with the prohibitive cost of paying for the legal complexities associated with compliance.
Additionally, regulatory guidelines also limit participants in an STO to only those with significant investing power. STOs must be listed on a regulated exchange since they have to validate all investors, which limits the exposure a security token has to the rest of the blockchain community.
IEOs Offered a New Investment Venue
The most recent fundraising method to show up is the initial exchange offering or IEO. With an IEO, the token itself is linked to a given digital asset exchange. An exchange lists the project’s token while earning both a listing fee and a percentage of tokens sold.
There are a few significant advantages to using an IEO, which is why many projects are gravitating toward this method. First, the exchange does marketing for the project. Second, coins are listed on the exchange immediately after the IEO, as opposed to a few months later, which is the case with most ICOs.
Lastly, participants receive their tokens immediately after the IEO closes. Investors can check their balances on the exchange which hosted the IEO. However, most exchanges require identity validation, so investors will have to complete the process before they can access their tokens.
ICO, STO, or IEO?
Each fundraising option has its own benefits and drawbacks, so always be sure to do your due diligence before investing in a token or project. Assess your risk tolerance as well as your desired investment goals to ensure you are choosing the right vehicle for investment. To stay current with ICOs, check out our initial coin offerings page. For regular updates on STOs and IEOs, be sure to subscribe to the Bitcoin Market Journal newsletter.
