The Battle: ICOs Vs IEOs vs STOs
Exploring the difference between the three tokenised fundraising methods and evaluating the growing popularity of STO and IEO model
The advent of decentralisation and the emergence of Blockchain technology has revolutionized the norms of the business world. The advancement of technology and the popularity of Blockchain has given businesses new ways to raise money, both from the general public or a pool of high profile investors. The rising dominance of Blockchain technology has bought us face to face with concepts like ICOs, IEOs, and STOs. So what are these terms and how relevant are they? Do they differ from one another? If yes, then how and above all which one is best?
What are ICOs?
The history of ICOs can be traced back to 2014 as a fundraising model to depart from traditional methods of Venture Capital or the Initial Public Offering. The ICOs garnered success in late 2017 and early 2018. The ICO model became a huge success when it came to fundraising by bringing the advantage of reduced upfront capital requirements and an almost negligible regulatory overhead. During the boom, ICO projects have raised over a staggering $25 billion and increased the total crypto market cap to over $800 billion.
Source: Alluva
But the success of ICOs didn’t last long as, by the end of 2018, the world witnessed the downfall of ICOs. The downfall was fuelled by numerous ICO exit scams, legal ambiguity, fraudulent token sale and malevolent intent of many ICO organizers scamming their investors, leading to investors quickly losing interest in ICOs. Apart from this, there were several backlashes and regulatory setbacks faced by ICOs in countries like the US, South Korea and China.
All about STOs!
Security Token Offering came as an alternative to the dooming ICO market in 2018, and the realization that regulatory compliances are inevitable in the financial spectrum. STOs hovered attention in the first quarter of 2018 and reached the pinnacle of popularity in November 2018. In an STO, investors get security tokens unlike utility token offered by ICOs. The security tokens are the crypto tokens stored on a blockchain that is supported by some underlying asset that holds some monetary value in the real world.
Source: Alluva
The STOs managed to provide investors with increased protection and a greater degree of transparency in the whole Tokenized fundraising Economy. The STOs are registered and approved by the United States Securities and Exchange Commission (SEC) and the Swiss Financial Market Supervisory Authority (FINMA). These STOs have to function in accordance with the regulatory guidelines as insisted by the SEC and FINMA.
The added advantage of security and transparency for the investors with STOs comes with the added cost and legal complexity. The regulatory compliances also limit the participants in an STO to institutional investors. It is also to be noted that security tokens can only be listed on regulated cryptocurrency exchanges as they are able to sufficiently verify investor accreditation.
IEOs, Ahead of ICOs and STOs?
Initial Coin Offerings are the most recent innovation to the tokenized fundraising economy inextricably linked to a specific exchange. In an IEO a project’s token sale is conducted directly on an exchange platform. The exchange demands the token issuers to pay a listing fee along with a percentage of the tokens sold during the IEO. In return of the fee, the project’s are sold on the exchange’s platforms directly, and their coins are listed immediately after the IEO is over whereas in case of ICO, where tokens are listed on exchanges several months after the ICO is over.
Source: InWara
IEOs don’t use smart contracts to distribute tokens after the token sale rather IEO participants have access to their balances via simply logging into their exchange account wallet. For investors to participate in an IEO and have a streamlined experience, they need to complete KYC verifications and other checks at the exchange level.
ICO Vs STO Vs IEO
The inclining interest of investors suggests that both STOs and IEOs are a better fundraising method for a project. ICOs have seen and helped the rise of the crypto economy but the IEOs are a force to be reckoned with STOs following similar suit. The tokenised fundraising methods as employed by popular and successful ICOs such as ARK, NXT, Ethereum etc revolutionised the tokenised economy. The ICOs give investors of every kind with cryptocurrency in their wallet independence to participate in the token sale.
Source: 101Blockchains
STOs, though not that popular because of its complex and costly implementation as compared to IEOs and ICOs, works within a regulated framework. The security tokens offered by STOs have real value because they are backed by a company’s assets. The STOs are the most trustworthy because it works within the legal framework of the SEC and FINMA.
The trend of IEOs is gaining pace, as its implementation is easier than STOs and safer than ICOs. A person having a verified account with a cryptocurrency exchange and some cryptocurrency in their wallet can participate in an IEO. As the reputation of the exchange is at stake, therefore investors can ensure that the project is trustworthy. The other advantage offered by IEOs unlike ICOs is that the tokens are listed immediately after a token sale and are available for trading. The backlash faced by IEO is that the tokens are not backed by some real value, unlike STO.
Conclusion
The tokenised economy is a new horizon for many investors and all three: ICOs, STOs, and IEOs give companies an easy way to raise money for their projects. All three offer their own advantage. The ICOs are bureaucracy free and unregulated, thus, involving common people into the fundraising business. But the lack of regulation has led to many fraudulent, scammy projects and Ponzi schemes.
STOs resolve the biggest hurdle of the lack of any guarantees and compensation if a project fails or turns out to be scammy but turns out to be costly while implementation. IEO is witnessing a sharp rise in popularity as it is an evolved form of token offering where an exchange runs the token sale itself. The future of the, tokenised economy is evolving with different projects coming with new ideas to launch a successful fundraising methodology. It would be interesting to see how the tokenised economy scenario prospers!
