Fundraising is central for startups, whether they’re moving into the world of cryptocurrencies or sticking to traditional markets. But what exactly are ICOs, STOs, and IPOs, and how do they vary?
Back in the day, fundraising meant events and face-to-face interactions, mainly for charitable grounds. Cryptocurrency has ushered in a new era of global communication and paved the way for new fundraising methods.
Initial Coin Offerings (ICOs)
So, what is an Initial Coin Offering or ICO? Well, it’s like when a new company in the digital money world wants to raise some money. They released a document called the White Paper, a kind of plan to tell potential investors what they were doing and how they were going to run their business.
Instead of regular stock, they give out tokens, for future stuff the company will do. People buy these tokens to support the company, but they don’t get a piece of the company like in regular stock deals. Instead, they can use these tokens in the company’s system. Investors can buy or sell these tokens to make money without all the hassle of traditional methods such as IPOs.
But here’s the thing: ICOs are not as regulated as regular money deals, so sometimes shady things or poorly planned projects fail. Between 2017 and 2018, there were many such token sales that raised billions, but some were scams or just plain bad news. That’s why people started getting suspicious and why governments started keeping a close eye on all of this.
Most ICOs take place on a blockchain called Ethereum. It has some advantages, such as being faster and easier for developers to use. It’s like a digital playground where developers can create all sorts of things, including tokens.
Security Token Offerings (STOs)
What is a Security Token Offering or STO? Well, after all the chaos where ICOs felt like the Wild West, STOs have stepped up to offer investors more security and clarity. Think of security tokens as digital versions of regular securities—they represent ownership of things and provide privileges such as profit sharing, voting rights, or ownership of things like property or artwork.
The first company to launch STO was Praetorian Group in the US back in March 2018. They received the green light from the US Securities and Exchange Commission and created a platform for investing in cryptocurrency real estate.
Even though STOs have been around for a while, they are still fairly new and there are only a few happening around the world. Countries such as Germany, Luxembourg and Estonia have regulations that make their fundraising methods legal.
Conducting an STO is fast and cheap thanks to blockchain technology. Smart contracts take on most of the work, eliminating intermediaries and speeding up the process. This new way of raising funds could shake up the financial world, especially for smaller companies that value low costs. STOs combine blockchain with the rules of conventional finance to make assets easier to trade and more accessible.
It’s kind of like the stock market, but on the blockchain, where you buy tokens that represent regulated investments. They are even issued on their respective stock exchanges, sometimes called tokenized IPOs. STOs are considered by everyone to be IPOs because they are regulated by authorities like the US Securities and Exchange Commission, so you know it is legal to invest. Ethereum is a big name for STO, but Stellar and Polymath also play a role by offering reliable platforms for token contracts.
Initial Public Offerings (IPOs)
A traditional IPO is when a private company decides to sell shares to investors. They do this by putting those shares up for sale on stock exchanges, like the New York Stock Exchange, so anyone can buy them. Now, in the crypto world, it’s kind of similar but with digital assets instead of shares. These companies sell parts of their digital stuff to the public. But, like with regular IPOs, they have to get approval from authorities first.
So, think of it like this: Just like ICOs and STOs, IPOs start with a plan laid out in a white paper. Then, underwriters or investment banks help set the price and sort out the legal stuff before the big launch. Launching an IPO takes time and effort. That’s why some crypto companies prefer quicker methods like ICOs or STOs. But going public can boost a company’s reputation. After the IPO, the company’s digital assets start trading on a crypto exchange.
Way back when, the Dutch East India Company was actually the first to do this. One recent big IPO was Coinbase. They launched their IPO on the regular stock market in April 2021, and their user base shot up from 43 million to 56 million after going public.
Key Differences
ICOs are pretty straightforward and good for smaller businesses. But here’s the thing – they’re not really regulated, so there’s worry about scams and shady stuff.
STOs are a bit safer for investors because they have more rules to follow. But those rules can make things trickier.
Now, IPOs give you actual ownership in the company, which means you get a say in how things are run. But getting involved in an IPO means dealing with a lot of rules and regulations.
