ICO vs IEO vs STO: A Comparison of Tokenized Fundraising

Beginner’s Guide / 27.09.2019

Trying to raise enough capital for a venture in the past was not very easy. The options were limited. Today, Blockchain technology’s innovative power makes a larger range of public funding options possible. By removing the place of a physical mediator in transactions and including transparency in transactions, the fundraising landscape expanded. As such, tokenized forms of funding, such as Initial Coin Offerings (ICOs), became a game-changing facet of business funding, especially in the crypto landscape. However, with development as part of the crypto ecosystem, other fundraising methods began to arise. Today, the likes of STOs and IEOs are making waves – thus bringing a surge of interest to the world of crypto assets. Let’s see how!

Initial Coin Offerings (ICOs)

Initial Coin Offerings are practically the longest-used form of crowdfunding in the crypto space. ICOs give companies the ability to raise capital for their projects by issuing crypto tokens at discounted prices for subsequent project development. With ICOs, token holders expect to get high returns on their investments as the tokens’ value appreciates in the market.  Setting up an ICO project is relatively easy, making it a preferred option for new investors and small projects. Here, investors look for projects that look fundamentally sound and promising since their profit is based on the future value of the token purchased.

Initial Exchange Offerings (IEOs)

Though relatively a newbie in the crypto market, it has advanced as an alternative form of ICOs. IEOs majorly entail a more direct form of offering crypto tokens to potential investors. Here, companies sell or exchange their tokens for another coin (mostly ETH) via exchanges to individual parties. So, instead of creating a smart contract with an ICO, the investor sets up an account with the exchange and sends ETH to the account. As such, when there is an IEO, the participants get to purchase the new token directly.

The peculiarity of this system of fundraising, though, remains that there is a characteristic centralization. In various cases, a high percentage of tokens are held and controlled by a small group of people, and the process of enlisting them with the help of exchanges can be cost-ineffective. In other cases, the flow of funds within this system is subject to the market movement. IEOs have made it so that inflation can be created initially, which later dies down as soon as the project’s coin is ready to be traded, making it risky in the long-term.

Security Exchange Tokens (STOs)

STOs, in their simplest forms, are like the advanced and regulated forms of fundraising in the crypto space. They create a bridge between the crypto world and the mainstream. They involve offering an investment contract, which is often adapted into an investment asset such as stocks, bonds, or real estate trust. They operate in ways similar to the traditional stock options so that the investment is recorded on a digital ledger system. They are majorly based on real assets and, as such, are subject to operational, regulatory laws. However, they are characterized by many details involved, thus making the integration of this fundraising system restrictive.

The Variations in the Tokenized Fundraising Landscape

Though these forms of crowdfunding have a common goal (i.e., raise enough capital for subsequent project development), they still have unique features that give them an edge over others.

One of the biggest setbacks of advancing the crypto world into the mainstream has been the decentralization that characterizes it. The regulation of the space has been a constant issue. ICOs gained sufficient traction due to the presence of a relatively relaxed regulatory procedure.

Strong regulatory influences go against the goal of decentralization and independence, normally integrated by Blockchain technology. Thus, with ICOs virtually a no man’s land, it is easier to gather funds for projects.

However, this – for the ICO landscape – means that investors run the risk of getting into fraudulent schemes or projects with no sound backups and continuity. STOs, on the other hand, are subject to regulatory procedures that are restricted to the regulations governing the platforms use for their offerings.

The majority of exchanges are subject to KYC/AML laws, which would restrict participation upon compliance. However, they have the advantage of giving companies the possibility to advance by harnessing the existing customer base of exchange and the trust inspired by the exchange on the project’s legitimacy. STOs are characterized by the high cost of fundraising and are heavily weighed on strict regulations and taxes. In fact, security tokens are classified as the US’s property, thus making their offerings subject to tax laws on property and real assets.

However, they have the advantage of being the most secure form of fundraising. This is because the legitimacy of the project and investor is properly documented and, as such, easily validated before investments.

Final Thoughts

ICOs were launched as an advanced form of the traditional Initial Project Offerings (IPOs) system. For years, it solved transparency in transactions by bringing Blockchain technology’s power to investors. However, with the need for higher security and regulatory frameworks becoming a constant in the world, IEOs and STOs became the typical go-to for various investment options.

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Born in Bucharest, Marius is the founder of Crypto Adventure. Since his first contact with Bitcoin and cryptocurrencies, he never stopped believing that they are one of the most important innovations of our time, which will forever change the way business is done.