This article compares the difference between ICO (initial coin offering), IEO (initial exchange offering) or STO (security token offering) and explains the subtle but significant differences between the three fundraising options.
Evolution in blockchain can be a double-edged sword. When it comes to fundraising the blockchain way, you might get lost with ever-changing technology advancement coupled with roller-coaster market sentiment rides. Whether it’s ICO, IEO or STO, picking the right method to raise funds for your project can be a “make or break” decision. The table below offers a simple comparative outlook on these three with further explanations right below it.
ICO (Initial Coin Offering)
A popular crowdfunding mechanism to raise investment for early or idea stage businesses or projects and statistically speaking, it shows. According to CoinSchedule, on average, an ICO project raised $23 million in 2018 compared to $14.5 million in 2017.
The difficulty to set up an ICO project is rather low where companies with only an idea (inked on a whitepaper), a website and a star-studded team and advisors could raise hundreds of millions of dollars. Due to its simplicity to set up, the cost is obviously lower than IEO and STO. But with lower investor protection and light regulation, some ICOs are downright scams. However, one person’s loss can be another’s opportunity because ICO can be a nifty investment vehicle for short-term investors who only aim to hop-on and hop-off, thus providing good liquidity. Governance for ICO can be relatively loose in countries such as Singapore as long as there is a real use of the ICO token or coin in the blockchain system that the company envisages. But countries such as the U.S virtually labels all ICO cryptocurrency to be a security as long as there’s no existing system that could utilize the token upon investment.
IEO (Initial Exchange Offering)
After ICO, comes IEO – a variant of ICO that promises better liquidity and protection to investors. How? By piggy-backing the project on a cryptocurrency exchange. Blockchain companies generally achieve liquidity by listing their tokens on these exchanges and what better than to do that by partnering with an exchange at first outset. Choosing (or being chosen) by an exchange to conduct an IEO is more difficult compared to ICO, let alone the fees that the exchange might charge upfront. The larger the exchange the higher fees are expected. But then, the exchange would perform the necessary due diligence that will protect its existing customers (who passed all KYC/AML process) who will be the targeted investors. The regulation level is relatively equal to ICO with self-regulation being the common the rule of engagement between the exchange and the IEO project owner.
STO (Security Token Offering)
The newest and arguably the most difficult and costly option is raising funds by issuing asset-backed token or coin which is essentially a security. Simply put, it’s a process of tokenizing securities (company stocks, bonds or assets like real estate). On the flipside, this option offers the best investor protection but lower accessibility because certain jurisdictions only allow accredited investors the opportunity to invest. Cross-border investment may also be challenging because different countries do have different securities regulations in place, to protect their citizens, especially from dodgy offshore investment schemes. Because regulation and governance are tighter around securities, so is liquidity. Some regulators, such as U.S Securities and Exchange Commission (SEC) requires a lock-up period in their Regulation S where investors are unable to cash out their investment for up to one year.