All you need to know about Initial Coin Offering (ICO) and Security Token Offerings (STOs)
ICO and STO are a way to tokenize tradable financial assets and offer them to the public in a responsible, regulated process.
ICOs in a nutshell
An Initial Coin Offering, or ICO for short, takes place when a company sells cryptographic assets known as tokens to raise funds for its operations. The tokens play a role in the project, and those who buy in early get them at a discount, assuming the project succeeds. The company usually opens the sale of tokens for a limited time until the money they need to raise is reached. An example of an ICO would be Ethereum, where Ether, the token used to power the Ethereum network, was sold to investors before the network launched to fund the project.
Tokens, in general, are divided into two categories – utility tokens and security tokens. Utility tokens are tokens that promise the future use of a product or service. They aren’t meant to be an investment; they have a utility. On the other hand, there are tokens that represent tradable financial assets, for example, a share or a bond from a company. Security tokens are meant as a form of investment. They pay dividends, share profits or pay interest in a way that promises future profit. Put simply, utility tokens promise a product or a service while security tokens promise profit.
Security Token Offerings
On the one hand, we have ICOs – a completely unregulated form of raising money from all around the world that’s fast and easy to execute and is filled with scams, frauds, and just plain negligence. On the other hand, IPOs are a long, expensive, exhausting road of raising money from investors by vetted, legit companies. But today, there’s a new type of offering called a Security Token Offering or STO, a middle ground between an ICO and an IPO.
An STO is a process of selling security tokens to the public while avoiding the long exhausting process of an IPO. There are no utility tokens in STOs, and everyone participating is considered an investor. STOs are intended to be compliant with Anti Money Laundering requirements and securities laws.
Advantages of STOs
- They remove the threat of scams through the implementation of regulation and oversight.
- While ICOs were traded on shady and unregulated exchanges, STOs are traded on verified exchanges.
- STOs open up bigger markets for investors since almost every asset class type can be tokenized.
- Fundraisers can reach a wider audience of investors as digital securities are easily marketed and transferred across borders.
Disadvantages of STOs
- In some cases, they offer the investment to accredited investors only. This seemingly excludes the Main Street investor while allowing only the rich to benefit.
- The lockup period and cost of compliance may deter many investors and companies from participating in STOs.
In the end, STOs have various pros and cons. At this point, they are more suited for early adopters, who are looking to invest in something new and exciting while still subject to some oversight, which offers a certain degree of investor protection. These are just the early days of STOs, and as we move forward, more and more companies, not just crypto-related, are thinking about how they can “tokenize” their assets in order to raise funds.