The abbreviations ICO, IPO, and STO all stand for tools for fundraising. However, there exists a certain difference between all of them as they work in a different way and undergo their own regulations. Although all of the three methods will work for certain types of companies, providing great benefits, there are particular things that might not be suitable for some of the potential issuers and shareholders.
While the market has witnessed a rise of the ICO in 2017-2018, it has soon fallen, giving way to upcoming innovations. The year of 2019 was said to be the year of the STO, a new method of raising funds that has its own benefits but comes with a list of limitations that need to be taken into account and researched before getting involved.
Let’s compare ICO, IPO, and STO in terms of existing differences and the positive and negative sides of each of the mentioned fundraising tools.
Definition of an IPO
IPO stands for initial public offering and is considered one of the most traditional methods of raising funds. It happens when the company issues securities which are the representation of its ownership. Before the company gets a chance to start issuing, it should undergo a long process with a list of mandatory regulations. The company needs to provide all the information about its financial performance and detailed plans for future development. Once done, one of the last steps is the audition of the company and its financial statements. Another important step that needs mentioning is changing the status. This is required as all of the issued shares need to be made available for the investors, hence, the company can’t keep functioning as a private one and will have to change its status to a public one. If the company passes the audit and acts accordingly, the issued shares are then placed for trading.
Therefore, companies, through initial public offerings, can reach to public investors who are capable of giving capital to the company. In return, investors who purchased a company’s share, get its holding.
The IPO fundraising tool has both positive and negative sides to consider. Among the existing benefits of the offering are potential business growth, increasing capital, absolute transparency and a good potential to get better liquidity. However, the whole process of moving, adjusting, and auditing can be both time-consuming and rather expensive for the company. On another note, all of the existing initial public offerings are very strictly regulated and more expensive in comparison to other ways of fundraising. Other disadvantages include a potential risk and competition due to the company’s finances, taxes, and other confidential information being publicly disclosed along with the company losing a big chunk of its control. This happens due to the given voting rights of the existing investors and shareholders which is massively affecting the power of the company during the process of decision-making.
All the above-mentioned minuses are the reason for many companies involved in the asset industry to choose other fundraising methods and tools which prevail in terms of positive results and the overall process.
Definition of an ICO
ICO stands for initial coin offering and is another method of raising funds. However, there exist quite a lot of differences between ICO and previously described IPO. Initial coin offering is all about tokens and their issuance. Blockchain here is a method of distribution while the tokens have no rights with regards to equities. The initial coin offering’s tokens, taking fiat or cryptocurrency, are in exchange given to different investors. With the ICO tokens, investors do not get the equity rights, but are, in return, given a certain goods or services utility, the ones that are owned and provided by the company.
The process of establishing an ICO differs from the one that is typical for an IPO. In order to start the process, there should be a paper published which aims to explain the project and the steps of its implementation. Start-ups can then have access to the capital which is not available in setting up an IPO. The overall process of setting up an ICO is easier because there are no restrictions in terms of investors’ types who are allowed to participate. With an ICO, even investors related to the retail industry have a chance to raise funds with the help of the offering.
One of the distinguishing benefits of an initial coin offering is its status of being unregulated when it comes to most of the existing jurisdictions with only one exception of the legislation related to anti-money laundering. The use of tokens allows the companies to start the process very quickly as the distribution is automated, transactions are easy with the fundraising being fast and efficient. Among the existing drawbacks is an already familiar lack of proper regulations. It is usually the main reason for scams and a very low level of credibility of the existing initial coin offerings.
Definition of an STO
STO stands for security token offering and combines the features of previously described fundraising tools – ICO and IPO. The security offering also issues tokens that fall under the classification of securities. The tokens in an STO stand for an existing asset, whether it is a fund, a bond, or a stock. The tokens undergo specific regulations that are provided by traditional legislation for securities.
Compared to an ICO, an STO offers higher levels of credibility due to existing securities regulations which are a benefit for investors. However, the overall process of setting up an STO is longer and has a list of requirements. With that being said, an STO is still considered better than the traditional fundraising method, IPO, as it is more effective in terms of costs with a faster process that uses a technology of blockchain. The only issue with security tokens is a lack of liquidity. This is due to the fact that the tokens use a novel technology and hereby are not a part of any of the stock exchange lists.
Tokens in an STO provide different kinds of ownership for potential investors. The first type is related to equities and allows investors to own a company’s equity. The second type gives access to assets. The investors here physically own an asset (for example, property). The last type is all about debt tokens. The STO gives the investors debt ownership (for example, a mortgage or a bond).
STOs are widely appreciated due to a list of benefits they offer. Investors, who are involved with an STO, have access to many advantages, including permanent dividends, rights to vote, and equities. Security token offering stands out for its speed. As there is no need to undergo a long process with a number of institutional middlemen, the companies who issue the tokens can do it faster and more efficiently. On another note, due to a small number of people who take part in the setting up process, the overall cost comes out far smaller than with the other fundraising methods. Furthermore, STOs are generally related to high levels of security. As there are a lot of measures taken in order to avoid changes in past transaction records, the latter are considered immutable.
Among other benefits of an STO is an opportunity which it gives for its investors to divide the owned assets into units. First of all, it is good for the second market transfer. Secondly, more investors can participate in the offering. Another thing worth mentioning is the easy exposure. That means that people, who would like to participate, most often need just a good connection to the Internet. Tokens, therefore, gain access to a larger base of potential investors.
Which fundraising tool is the best?
So what are the features that make ICO and STO so much different?
Both offerings use tokens and allow companies to raise funds at the end. However, they are not the same in their structure. Companies, working through an ICO, do not offer investors the company’s ownership or potential dividends. Their aim is to provide development and maintenance of the market which they achieve through token trading. The tokens can be utilized in services within this market. In order to grab the attention of the investors, the companies, who plan to participate, need to showcase that the tokens can be widely used and utilized without any problem. Although an ICO offers a quick and easy set-up, investors should carefully consider all the risks which might be related to lower security and legislation levels.
An STO, in return, is dealing with assets. This means that the security tokens do have a certain level of the given value. For the company, which demonstrates significant assets or revenue value, this method of funding can be highly beneficial. Security token offerings have different types of ownership which give the investors flexibility and may be of great advantage for the issuing company.
The main difference between an STO and an ICO is the level of legislation. This means that the offerings sell, trade, and transfer the tokens in a completely different way. STOs, for example, should act according to existing securities rules, which are given by each and every country where they offer the tokens. In this case, many retail investors cannot participate in the offering, therefore, most of the existing world’s STOs have been raised from a base of accredited investors. On another note, an STO has a lot of restrictions in terms of transferring and trading depending on rules and regulations on a certain location.
Comparing ICOs and STOs, the latter gives more opportunities in terms of the use of the tokens and their flexibility. STOs provide not only dividends but also voting rights and asset ownership.
Now, let’s look at the STO in comparison to an IPO.
The offering that represents equity has, in reality, a much narrower market than the one that works with security tokens. With that being said, an STO is winning over the traditional offering by providing a broader use. One of its biggest pluses is that an STO gives a chance for companies, who are not yet ready to work with an IPO, to gain access to the big audience of existing investors. Although new companies and start-ups might have difficulties with showing their greatest potential in terms of their assets, the ones, which have been on the market for a while and have all the means to prove the value of the assets, have all the chances to win over a large number of investors.
Security token offerings are known for providing asset ownership, better liquidity, and desired flexibility while all of the above are not so fully available for the IPO’s shares. However, initial public offerings, being a traditional and safe method of raising funds, will be highly beneficial for companies in later stages of fundraising. IPOs will be used until the newly created STOs receive enough trust among investors and develop their infrastructure to the point where they can outperform the traditional offerings.
A lot of companies require regular fundraising and are always seeking the best ways to do it. However, the process of choosing the right method appears to be both difficult and time-consuming. Among the above-mentioned tools, an IPO gives the best credibility being, at the same time, strictly regulated. ICO, in return, barely has any restrictions but is considered the one with the absolute liberalization. The last described method, an STO, may be regulated in the same way as an IPO but investors can benefit from the technology of using blockchains. On another note, STOs are generally considered more flexible in terms of provided tokens.
The task for a company, trying to determine the best possible fundraising tool, is setting clear goals and understanding which method will be highly beneficial for them at this particular stage of their development. But, there always needs to be a balance: the offering should have enough regulations which will ensure higher levels of security but also offer flexibility and innovative solutions for efficient and effective fundraising.