STO vs ICO vs IPO: How to go about it and what challenges are you facing?
Development or expansion of your business always requires huge financial outlays. If the project requires a lot of capital, the chances of financing it whole out of the pocket are small. In general, many companies raise capital from external sources by conducting an ICO, IPO or STO.
Where do startups get their finances from?
Financial requirements are usually facing two main problems – debit capital and equity. While debit capital includes borrowing capital from banks or friends, equity is a place where money is accumulated in exchange for part of the company. The traditional method of raising equity is quite complex and not very attractive these days.
In the last decade, many startups have developed around the world. But over 80% of them failed due to cash flow problems. Growth of potential startups is delayed due to many raising capital challenges.
Thanks to a new era – ICO and STO enable obtaining funds necessary for startups. Below we will explain in detail how IPO, ICO and STO differ in terms of raising capital.
Initial Public Offering (IPO)
The initial public offering (known as IPO) was the first foundation of the modern financial system. This is a type of public offering in which part of assets is offered to an institutional or retail investor.
The company gives up part of its shares, making them available to shareholders who then trade them on the stock exchange. A private company announces IPO, and the process is called publicity. This gives you great opportunities to raise funds for the company.
IPOs are always required to be listed on stock exchanges, and before a company enters the stock exchange, it must submit a registration statement to the securities supervisory author
First token offer (ICO – Initial Coin Offering)
Commonly known as ICO, the term began to make the rounds among startups as the cryptocurrency market matured. It is a type of crowdfunding model in which digital tokens are distributed among early token sales support entities to finance the further development of the project.
The mechanism is quite similar to IPO, but does not include shares, and ICO participants receive digital tokens in return, which can later be liquefied into securities or other cryptocurrencies available on the market.
source: Initial Coin Offering (ICO) – Jake Frankenfield
- ICO does not give tokens owners shares in the company,
- ICO participants receive a symbolic equivalent of their investment in the project,
- The duration of the ICO is often very short,
- Like some public offers where purchase is limited to institutional investors only, ICOs can be purchased by anyone,
- ICOs are currently completely unregulated and do not require the creation of legal documents, such as an issue prospectus, to make them public,
- Although there are no management or regulatory bodies that control ICO activities, other bodies are trying to build a regulatory framework around them to protect participants’ rights. ICOs are high-risk investments and thorough research of the project should be carried out before participation – read whitepaper and get to know the people behind the ICO
Security token offer (STO)
The ICO model has proven to be very effective in raising huge capital, but due to the unregulated ecosystem, many ICO projects have tricked investors. The STO or security token offer is a legal investment agreement under which digital tokens are issued to investors, but with an underlying asset, which may be shares or bonds.
The security token offer (STO) is information about ownership that offers investors financial security in the form of a digital token.
STO vs ICO
Although the STOs given instead of funds are the same as for ICOs, the features of both tokens are different.
source: Security Token Offerings (STO) VS Initial Public Offerings (IPO) – Comistar Global
- The ICO token is primarily a tool token, and STO is a security certificate.
- STOs are regulated, while ICOs are currently free from any regulations.
- STO conditions are more stringent than ICO, which limits STO access for the average person.
- The fundraising is mainly driven by accredited investors.
STO vs IPO
The STO issuing process is similar to issuing an IPO, in which physical or digital certificates are distributed to shareholders, but STO distributes digital blockchain tokens.
- STO and IPO are regulated by managing authorities,
- STOs can be offered by any legitimate company, while in the case of IPOs the company must be private,
- STOs are an asset-based token, and IPO is a packet of shares,
- Acquiring funds using STO is profitable and less time consuming, because investment banks do not pay large fees,
- STOs are easy and cost effective to manage after sales.
Is IPO + ICO = STO?
Yes and no. There were rumors that the STO would completely replace the ICO at some point, but nobody is sure if it will happen. The blockchain network is unpredictable and although there are similarities between ICO and STO, there are also significant differences. Investor protection and a rigorous verification process for all are just two examples. STO can be better compared with IPO on a blockchain. On the other hand, unlike on the stock exchange, blockchain is decentralized; which makes STO a more convenient financing method for beginners who want to collect money and become unicorns – companies with significant financial impact and investors who are investing and waiting for the release of an interesting product.
"One of the merits of #STOs is that they transfer legally binding rights in a company or an asset to the #investor. With many #ICOs it is unclear what, if anything, the buyer is taking possession of." #STO vs. #ICO #IEO #IPO #blockchain #CapitalFormation #assets #investing $BTC— Woken Token (@token_woken) May 8, 2019
The beauty of STO lies in the fact that in its heart lies a security token supported by something tangible. Whether it’s gold, real estate, stocks, rare works of art or even collector’s items, the benefits are greater than the combination of ICO and IPO. Entrepreneurs got tired of fighting the regulations; they do not want to give up ownership or spend millions on developing a product that may not be accepted. Entering the stock market as a company is expensive, not to mention that the application process can take up to 6 months.
Certain voices in the network say that the offers of security tokens (STOs) are simply IPOs in the blockchain network; an exaggerated statement with some truth. A more realistic definition would be: a hybrid approach that combines the best features of ICO, removes the worst features of IPOs, and whose goal is to protect both startups and investors.
Which option do you personally are inclined to invest in? Contact us and we will help you tokenize your idea!