In this article today, we would give an exposition of the STO vs ICO debate. The core aim is to understand the growing mode of raising funds for a new class of venture capital firms, that is, those with an interest in cryptographically designed tokens.
The financial industry is full of confusing acronyms. There is IPO, ICO, STO, and even IEO. Today we only break down two of them. Why? Because they are the most innovative to gain liquidity for your next project. Since Bitcoin, thousands of breathtaking innovations came up to disrupt the technology sector.
Let’s learn together once again, shall we?
What is the difference between ICO and STO?
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The difference between ICO and STO is primarily in the regulatory backing both forms of blockchain technology-based fundraising model boasts of. Initial Coin Offerings are typically less guarded by regulators and the provisions of the law, while a lot of scrutinies are made before a startup could issue any Security Token ICO.
Another major difference worth highlighting is the role of the issued tokens in both forms of the fundraiser. The digital assets being issued in an ICO typically represent a utility token that is central to the operations of a blockchain-based platform. The tokens could grant all accredited investors access to the protocol and its products or services.
STOs on the other hand are fundraising methods that represent the tokenization of a company’s stock. Participating in an STO round may imply taking ownership of the company’s assets or other notable securities, for which a profit or dividend is paid out to the investors. The scope of the ICO and STO can be redefined by the issuing firm, albeit for the latter, all propositions must be backed by law.
What is STO (security token offering)?
A Security Token Offering is a crowdfunding model for blockchain or any outfit with a digitized product or service. It is backed by law or the relevant securities provisions in the region where the startup is based. Due to this regulatory backing, investors get a level of protection for their investments.
In the world of cryptocurrencies today, there are firms that offer STO blockchain. More specifically, STO is also offered as a crypto token. The idea in an STO is simple; tokenize a portion of your assets or products, and sell it out to members of the public for them to gain part ownership in the company.
Just as investors who buy the shares of a company enjoy dividends, STO crypto investors also enjoy the benefits applicable to their investments.
When should you choose an STO?
As an investor, you should consider investing in an STO when you have a limited risk tolerance or place a huge emphasis on investor protection. Should anything go wrong with the investment, you can be sure that the extant securities law can come to play in your favor and serve as insurance to recoup your losses.
What is ICO (initial coin offering)?
An initial Coin Offering (ICO) is the first model of raising funds amongst blockchain startups. We already talked about it in depth here: what is an ICO? But, unlike STOs, applications for the issuance of tokens for sale in ICOs do not need to be registered with the securities and exchange commission or the body tasked with regulating financial and crypto markets in the country.
The allowance given to ICO based on the lack of regulation or related vetting makes it easy for anyone to float a project. While there are a number of successful ICOs, many of these unregulated token issuances turn out to be a scam. As pointed out earlier, most ICO token issuers sell out digital tokens as utility assets for accessing a part of the startup’s business.
When should you choose an ICO?
Investors can opt for an ICO when they have a high-risk tolerance. The investment in an ICO is best described as a high-risk, high-reward venture and there is no security for funds. If you are looking for a list of potential investments, then check out our review of the best ICO websites.
ICO vs STO comparison
In the table below, we are going to expound on the Security Token Offering vs Initial Coin Offering narrative.
|Risk||Low risk||High risk|
|Convenience||Not so convenient for token issuers. Investors need to pass regulatory checks too.||Quite easy for both the token issuers and investors. Once the right platform is available, less effort is needed for the ICO sales.|
|Regulatory requirements||Prospectus filing may be made compulsory for STOs.||Can be bypassed|
|Growth potential||A lower investor base and backers can be limited based on the underlying regulations.||ICOs for example that of Ethereum can be very successful as there are typically no boundaries to the investor base.|
|Limitations||Time required to complete regulatory checks.||Limitations are not regulatory-based. Other factors such as poor marketing can pose limitations to the success of an ICO.|
|Challenges||Each startup or firm has its unique challenges.||Project diversity would bring a different challenge.|
|Public Exchange Listing||STOs are listed on trading platforms under the regulatory oversight of the market regulator in the country.||There are dedicated cryptocurrency exchanges where the underlying assets from ICOs can be traded. Some of them are under market regulators’ radar.|
STO vs ICO differences in depth
After giving you a brief overview, let’s go into the details. The differences between STO and ICO in a way to gain more insight into both crypto fundraising models.
1. STO vs ICO risk factors
The inherent risks in STOs are typically low as the regulatory oversight just like traditional securities offers adequate investor protections. ICOs do not offer this type of protection to their investors, and as such, can predispose investors to losses. The risks are heightened as there is no KYC or AML documentation.
The lack of government backing has predisposed the blockchain funding ecosystem to a number of scams over time. The only regulatory action that is meted out to ICO issuers is when the tokens are sold to American residents or other countries where the sales are generally prohibited.
2. STO or ICO which is more convenient?
The broad oversight from regulators has made STOs a not-so-convenient venture for token issuers. Investors may also be required to pass some regulatory checks in order to participate in fundraising. Many investors in the cryptocurrency market typically avoid backing financial instruments with so much oversight from regulatory bodies. This may strain the issuers a bit.
ICOs are typically more convenient. Once the technology is ready, the brokerage platform for the token issuance is perfected, and the chances of success become higher. With good social media publicity also, projects aiming for an ICO gain more visibility and all these make the process more convenient.
3. ICO vs STO regulatory requirements
The filing of a project or company prospectus detailing the terms of the STO may be required amongst other regulatory demands. ICOs can typically bypass such requirements as issuers answers to no regulator. However, potential investors in an ICO may gain access to a Whitepaper that may contain such details as technology, terms of the token issuance, amounts of money projected to be raised, and the project tokenomics amongst others. Regulations are set by each country.
4. ICO vs STO growth potential
The growth potential for STO is lower as the investor base, and backers can be limited based on the underlying regulations. ICOs for example Ethereum (ETH) became very successful as there are typically no boundaries to the number of investors that can participate.
5. Volatility of ICO and STO coin
ICO tokens are typically more volatile than their STO counterparts. Also, be aware the investors have no legal rights if the funds are lost. Volatility will continue according to the latest PWC report.
6. Cost factors of STO and ICO
Save the costs involved in meeting all regulatory requirements, the financial implications in building a smart contract for an ICO, or tokenizing a real estate product as the case may be are usually relative. Various projects have their complexities which typically impact the overall cost of delivery.
7. ICO and STO challenges
Every project has its own inherent challenges which are typically relative. The types of challenges that may arise vary but may involve protocol hacking, and rug pulling amongst others. For STOs, the regulatory burden may pose a challenge to the project.
8. Development platforms for STOs and ICOs
These core difference between STOs and ICOs is also relative, however, most STO and ICO issuers usually rely on Blockchain technology to develop the underlying assets or tokens. Some great platforms to develop ICOs and STOs are Polymath, Ethereum, Securitize, EOS, and Tron.
9. Public Exchange Listing
STOs are listed on trading platforms under the regulatory oversight of the market regulator in the country. There are dedicated cryptocurrency exchanges where the underlying assets from ICOs can be traded. Some of them are under market regulators’ radar.
Securities token offerings and Initial coin offerings are some of the most common ways of raising funds in today’s decentralized finance ecosystem. They are similar to Initial Public Offerings (IPOs), except for the differences in the underlying assets. While tokens from STOs are traded on regulated exchanges, ICO tokens are listed on dedicated digital currency trading platforms.
In one of our next posts, we will also cover the last option you have, the IEO (initial exchange offering) but as always, we keep things simple.
If you like to learn more, then enroll in our courses, take a cryptocurrency trading course, or book a free consultation to launch your own ICO or STO together with us. Also, make sure to follow us on Facebook, Twitter, LinkedIn, or YouTube for more advice.
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