ICOs, IEOs, and STOs — The Revolutions and Evolutions in Blockchain Token-Based Crowdfunding
Crowdfunding — The Way It Was
Initial Public Offerings (IPOs) and stocks have been, for a considerable stretch of time, known as proven and valid means of crowdfunding. It cannot, however, be denied that the practice has become a bit too archaic. The process is cumbersome and it is plagued with a lot of intermediaries that translate into costs.
The Blockchain Revolution
With the introduction of the decentralized ledger technology(DLT) called blockchain, crowdfunding has become considerably simple and easy. Over the years, crowdfunding methods powered by various blockchain network have evolved to become more regulated, accessible, and available.
Ask any crypto enthusiast and they will, from the top of their minds, recall Initial Coin Offerings (ICO), Initial Exchange Offerings (IEO), and Security Token Offerings (STO). The crypto/blockchain crowdfunding landscape has been dominated by these three different methods so far.
ICO — The Pioneer
Initial Coin Offerings, or ICOs as they are commonly abbreviated can be considered the harbinger of crowdfunding in the fast-growing cryptocurrency industry. ICOs heralded to the world that this distributed ledger technology that was once confined to just crypto coins can now be used to collect funds for your crypto project/product.
In an ICO, the project opens the offering by providing prospective investors with utility tokens. Utility tokens are tokens that do not have any monetary value but only provide access to a certain “utility.“ The utility could be a premium feature in the product or access to the product itself or voting rights in the company or anything that does not signify explicit monetary rewards for investors.
ICOs are highly unregulated and it does not fall under the purview of any regulatory body like the SEC or its equivalents in any other jurisdiction. This has prompted a lot of malicious people to launch scam ICOs. This has resulted in a heavy tarnishing of the image not only for ICOs but also for any other blockchain-based crowdfunding method.
Since the tokens do not have an assurance of being profitable, it was taken with a pinch of salt. Moreover, when the crowd sale was done, there was no assurance to the investors that the token would be accepted in a crypto exchange.
In spite of these uncertainties, ICOs saw tremendous success and the year 2017 and the year was referred to as the year of ICOs. Slowly, the popularity of ICOs started to diminish but to this day, it continues to be one of the most popular methods of crypto crowdfunding.
Another factor that has contributed to the decline of ICOs is the way in which the SEC has defined “security“ by using the Howey test. Even if a token was intended to be a utility token by its definition, it is possible that the token might eventually become a security token if it evolves to give monetary benefits. This would mean that the entire ICO would come under the regulatory purview of the SEC.
To enhance security and to ensure that there is no degree of centralization involved in the ICO, some companies have started to offer DeFi ICOs. They present investors with a fine point of being outside censorship but at the same time, being completely secure and dependable. If at all ICOs have to make a comeback, it can only be made possible through DeFi ICOs.
The next two crowdfunding methods sought to eliminate the uncertainties associated with ICO.
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IEO — A Step Closer To Eliminating Uncertainty
Initial exchange offering, abbreviated IEO, sought to render obsolete the uncertainty associated with the listing of the utility tokens on an exchange. Rather than waiting for an exchange to accept a utility token, crypto project entrepreneurs can ensure that the utility token is directly made available on a reputable and well established exchange.
This ensures that the investors will, at least, have an option to trade these tokens for other crypto coins or tokens. This, however, comes at a considerable expense. Premium cryptocurrency exchanges have been known to charge in the order of millions of dollars to get a token listed on their exchange. They also take a good proportion of the issued tokens as a fee for listing a token on the exchange.
It might not be a mighty price to pay for the crypto entrepreneur considering the fact that their investors not being able to exchange the issued tokens would be a bigger pain point and detrimental to the brand which might cost them even more than what it takes to get listed on the exchange.
As you may have observed, IEO is a win-win situation. The exchange gets to pocket some profit from the crypto entrepreneur in exchange for the advantage of them getting their token listed on an already established exchange. It also makes entrepreneurs believe more in the token offering. The responsibility of gauging the product/project, establishing authenticity, and ensuring there is no scam element falls on the exchange. This makes investors believe that the listed token is far more authentic than what they might find in an open ICO.
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STO — Making It Organized & Regulated
In a security token offering or STO as they are abbreviated, the very first word carries massive significance and importance. The very mention of the word “security“ brings in regulatory authorities and mandates compliance with the rules laid out by the SEC.
The STO was a direct offshoot of the excessive number of scams that ICOs presented. The SEC noted that it was essential to address these issues in crypto crowdfunding and to properly regulate them. An STO is expected to follow all the rules laid out by regulatory bodies.
Unlike ICOs and IEOs, an STO issues security tokens. This would mean that these tokens carry a monetary value and can be exchanged for any crypto or fiat currency. There are, however, limitations with respect to the portfolio of investors. Based on your offering, you will need to fall in one of the regulations that might limit your prospects to probably just accredited investors.
Investors have full confidence when purchasing security tokens offered by the STO. Security tokens might be more expensive than utility tokens but since they have the element of authenticity, people are willing to pay the price.
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Which One Is The Best For You?
There have been instances where, in spite of the degree of authenticity and regulation offered by STOs, people have wanted to retain their offerings to be ICOs. Therefore, there is no one-size-fits-all answer. Depending on your product, the offering, your expected portfolio of investors, and the monetary value of the utility offered by your token, you can decide on whether you need to go for a STO or an IEO or an ICO.
If you are just getting started, it is strongly recommended that you approach an initial coin offering development company to get your ICO started. It is the easiest and the simplest. In this, we assume that you do not have any malicious intentions!
Whatever be your choice, the good news is that there are accomplished and reputable blockchain development companies that can give you development services for all the three crypto crowdfunding methods. All you need to do is get in touch with a company that specializes in IEO development, ICO development, and STO development. They will take care to understand your requirement and present you with perfect blockchain based crowdfunding solutions for skyrocketing your crypto business.