STO vs ICO vs IPO: How to go about it and what challenges are you facing?
If you are wondering about the right way to finance your company’s project, this article is for you! There are various ways to invest in the cryptocurrency environment, and one of the ways in which new projects are looking for funds are called STO, ICO and IPO. What do these “mysterious” abbreviations mean and how STO, ICO and IPO are different from each other? What are their pros and cons? How to carry out an effective ICO/STO? Let’s start with the definitions.
What is IPO?
IPO is an abbreviation of Initial Public Offering. IPO is conducted when a private company decides to offer shares publicly for the first time. It can be said that IPO is a traditional way to buy company shares. When the company carries out an IPO, it does not necessarily mean that it is a new company, it may already be a well-known brand that has been in the market for a long time but has not yet offered any shares to the public.
The basic benefit of being public through the IPO is the ability to quickly raise capital by reaching a large number of investors.
A debut on the capital market improves the company’s image in the eyes of contractors and makes the company transparent. In addition, the company may use the name “public company”, which increases trust in this company, regardless of the industry and the type of relationship between entities.
However, the cost of complying with regulatory requirements can be very high. What’s more, public enterprises are also facing additional market pressure, which can make them focus more on short-term results than on long-term growth.
Successful implementation of the IPO requires a lot of effort from the management in order to meet the imposed deadlines related to entering the exchange, conduct many meetings with analysts and prepare financial reports required by applicable legal regulations on time.
What is ICO?
ICO is short for Initial Coin Offering. It is one of the most popular crowdfunding methods as it is the easiest to run. This is a type of financing using cryptocurrencies. In simple words, when someone creates a new cryptocurrency project, he can receive funds from investors by selling tokens in exchange for legal tender or other cryptocurrencies. Like on the stock market, the investors will gain profit if the value of the tokens increases from the original price of the token.
For example, during the ICO Ethereum collected 18 million dollars, and the EOS platform as much as 185 million dollars.
In ICO conditions are different than in an IPO. Most of the cryptocurrencies are done via ICO. ICO is a term used when the cryptocurrency is made public. ICO is done for the same reason as IPO – to generate more money. But when you invest in ICO, you do not have a stake in this company. In other words, by investing in the ICO of the company, you get a share in the market capital, but not in the company.
Some of the ICO advantages involve: the cost of ICO introduction is relatively low. The process is quite simple and less complicated compared to STO and IPO. There is less government intervention and greater liquidity in a short time. Investors have full control over their funds.
Conducting an ICO usually starts with the announcement of this on one of the cryptocurrency forums. The organizers provide information about the project there. Among them is a whitepaper, a short description of the application of the technology used in the project and the method of subsequent use of tokens that investors receive in return for support. It is also necessary to specify the minimum required amount necessary for the start of the project – if it is not achieved, the organizers should return the funds received.
ICO support may be provided by conventional money deposits or deposits in the form of cryptocurrencies (most often it is Bitcoin or Ether).
The legal status of investing in ICOs in most countries is still unregulated. In general, tokens are not considered financial assets, but some countries are beginning to see their similarity to securities. Opponents of this view indicate that ICO does not offer shares in the project, only a “discount” for the purchase of cryptocurrency, which is not in itself security.
What is STO?
STO stands for Security Token Offering, and it is a different form of raising funds than ICO. In STO, users can buy crypto tokens, which are backed by an asset or revenue of a company.
STO, as its name indicates, features security tokens, and therefore, STO provides financial security, also because it is subject to federal trade regulations.
You can think of utility tokens (ICO) as a chance for a future reward in case the new crypto project succeeds while investing during STO is more financially stable.
Although STO is regulated – like IPO – in STO fees are significantly lower compared to paying investment banks or brokers. In STO, administration costs are also lower, as some platforms have developed legal structures for conducting tenders. Many companies have not done ICOs because of uncertainty and IPOs – due to its complexity and costs. STO’s advantage is also that it is not connected to any country. For example, it is not common for a Pole to invest in an IPO carried out in Portugal. Very often it is not even possible if you do not have an investment account in the brokerage bank of the country in which the IPO was made. Therefore, IPOs are most of the time carried out only in jurisdictions in which the company operates. There is no such problem in STO.
How to carry out ICO / STO?
When carrying out ICO/STO, we must ask ourselves: can we guarantee a competitive advantage? Does the project give something more innovative, will some new technology be used, do we have a chance to “overtake” the competition? Does our project solve any particular problem and is aimed at a specific target group? We need to analyze the market well, gain knowledge about the whole process to prepare ICO/STO, establish cooperation with advisers in this field. Investors will not be interested in a project that does not provide innovation.
We also need to answer the question: what kind of token we want to prepare. This can be a utility token (ordinary ICO) or a token that carries securities (carrying out STO). If we want to give investors the right to dividend, guarantee them a secure legal basis in our project, we should opt for STO. This will involve significantly higher costs than utility tokens, but it gives investors a greater guarantee that a given project will use capital as intended. If we have already carried out market analysis, we know how the project is legally and business working, then we can start to build a team. Of course, we must choose the company’s president, adviser and the law firm and influencer or a company that will build a smart contract and select the appropriate platform, such as Ethereum or NEO. One of the most important issues is writing a whitepaper, usually, teams do not cope with this, because they do not know exactly what is to be included in this whitepaper, in particular when it comes to STO where there are greater requirements (related to legal requirements). In addition, we need to prepare additional documentation such as a one-pager and various presentations.
Going forward, we should implement the KYC / AML procedure, we should know from whom we take the funds, and carry out a survey of investors who would like to invest measures to counter the financing of terrorism and money laundering. If we do not implement these procedures at the stage of raising capital, it will be difficult for us to transfer capital accumulated in cryptocurrencies to FIAT currencies, because most of the financial institutions with which we would like to cooperate will also want to know whether we meet legal standards. We should also have investors consent for sending marketing content and proper processing of personal data, and hence the GDPR. Other things to note are Terms & Conditions of our platform. You also need to secure money and conduct hacking tests, when it comes to STO an audit is required – you have to meet the right conditions to get a certificate. We should also take care of the roadmap and divide it into three stages. The first stage is everything that happened before ICO / STO, maybe we created a demo product. The second stage is writing out how the ICO will run, whether it will be public or private. In the third part, we show what exactly we will go through after collecting capital. We must also take care of visual identification, that is, graphically pack our venture: a good landing page and a nice logo, a professional whitepaper. We should also pay attention to the relevant trademark; pay attention to whether the token shortcut is already reserved. You should pay attention to professional marketing and PR – cooperating with a company that is familiar with and specialized in the cryptocurrency market.
We must decide in which jurisdiction we want to conduct the STO. STO is not an option everywhere – the law does not allow to tokenize securities everywhere. It is necessary to decide whether we plan a private or public emission – a private one should be directed to a small group of investors who can invest a larger amount of money. Such emission is cheaper and easier to carry out, but if we count on a large number of investors, then we are interested in a more costly public emission. Both options are attractive – depending on the investor we aim for. After conducting the emission and collecting money, we should change the marketing message and show the progress of our project, so that investors feel that we meet the goals and conditions that we described in the roadmap – this may also affect the price of our token. Then we should try to place the token on the exchange. With ICO it is definitely easier, while at STO – regular exchanges may refuse to place this type of token – we should aim more at private platforms. You should also take care of the actual implementation of the project, “bring it” to the end. The stage of raising capital is the first thing, then we focus on the implementation of the project. In order to maintain the value of the token, it is necessary to maintain communication with the community all the time by changing the landing page, and running social media channels.
Trying to carry out an ICO/STO/IPO yourself can be a challenging task. We must have a lot of knowledge about the cryptocurrency environment, but also about marketing and programming. It is worth to outsource an effective ICO/STO/IPO to an external company familiar with the blockchain technology. After reading our article, we hope that you understand the basic definitions of ICO, STO and IPO. Remember that carrying out an effective IPO/ICO/STO is a difficult task and the above-mentioned factors are just the beginning. Having no previous experience in such projects or generally in the world of cryptocurrencies, it can be really hard for you to succeed, even if the idea and commitment are really imposing. We know from our own experience that both experience and knowledge of the industry, as well as networking, give a lot, so being a “lonely hero” is not always the best way. It is worth considering the search for experienced companies that specialize in this type of campaigning and designing from basics, just like our software house. You can be interested in our case studies, remember that the idea is only a tip of an iceberg, what counts is the performance, so if you think that your business can change the world – contact us and we will help you with this!