ICO vs. STO: What's The Difference?

In traditional capital raising, there are only 2 ways to raise money: issuing debt or issuing equity. Both of these solutions have issues. However, the rise of blockchain technology has brought about a new way to raise capital that hopes to resolve some of the issues surrounding traditional capital raising. There are 2 main forms of capital raising that involve the use of blockchain technology: ICOs and STOs. Today, we are going to explore the differences between the two. 

How is ICO different from STO?

An ICO, or initial coin offering, involves a project issuing coins as a way to raise capital. These tokens may have utility, such as providing voting rights or access to exclusive rewards. This is the way that most cryptocurrencies are released onto the market.

During an ICO, the issuer can decide if they want to have static or dynamic prices and supplies for the coin. This can allow them to strategize a way in which the most capital can be raised. 

Tokens acquired via an ICO do not represent ownership of the project nor are they required to be paid back; they are simply an investment in the project with the hopes of the coin appreciating. 

A security token offering (STO) is when a company releases tokens as a way to raise money. However, these tokens are representative of something. For example, the tokens can represent a share of equity in the company or give the owner rights to a portion of the company’s profits.

An example of a successful STO is INX. They are a crypto exchange and platform to trade digital securities that recently raised over $85 million via an STO. Each token from the STO represents ownership of a portion of the company’s net operating cash flows. After working closely with the SEC, and being successful with the STO process, INX is now helping/guiding/leading other companies who seek to go through this desired path and enjoy similar results.

How Do ICOs and STOs Work?

ICOs and STOs occur in very different ways. ICOs are subject to very little regulation, whereas security tokens are required to register with governments and adhere to regulations. 

In the case of an ICO, a new token can be put onto the market with ease. With only a small investment and some rudimentary coding skills, essentially anyone can release their own token. 

For an STO, the issuer must create several documents that state the purpose of the project and confirm that the issuer will follow all rules associated with the STO. 

In each case, investors purchase tokens and the company receives capital. However, STOs are subject to more regulation and are representative of some form of ownership. ICOs face almost no regulation and tokens are bought with the hopes that the price will increase. 

ICO vs. STO — Advantages

ICOs and STOs each have their own advantages. For ICOs, the main advantages are ease of issuance and quick access to funding. 

As stated, ICOs can be issued by almost anyone and are the quickest way to get your token on the market. In some cases, ICOs can go live in less than 24 hours. This speed at which you can get your token on the market can also lead to quick funding. 

For STOs, the main advantages are creativity and regulation. 

STOs allow issuers to give out forms of ownership, ranging from equity to assets. This allows room for issuers to get creative with their STOs to attract investors and create a mutually beneficial token. 

Additionally, STOs are subject to regulation. This can make them safer from the perspective of an investor. These regulations can keep your investment safe and provide peace of mind.

If you are choosing this pioneering path, it is important to do with a reliable, regulated, and experienced company. While it’s tough to find, it’s possible. INX for example, is SEC-registered and claims to have the most successful experience if you are looking to invest or issue your own STO. 

ICO vs. STO — Disadvantages

ICOs and STOs also come with their own disadvantages. ICOs face scrutiny for their lack of regulation and risk.

ICOs face virtually no regulation and anyone can create their own token. Some saw this lack of regulation as an opportunity to scam investors. One example is the Squid Game token, which used faulty advertising and a fake roadmap to attract investors and then ran off with the funding they received.

This lack of regulation also poses a risk to investors, as they can lose their funds. In the case of the Squid Game Token, millions of dollars were lost and have not been recovered. 

For STOs, the main disadvantages are a new market and complex regulations. 

STOs are a relatively new idea and not many companies have utilized the form of issuance. As such, it may be hard to find projects to invest in or attract investors for companies looking to use an STO. 

Additionally, STOs face complex regulations that may be tough to navigate on your own. INX provides a full legal team to anyone looking to raise capital via an STO. This can greatly reduce the stress and cost of conducting an STO. 

Takeaway

Overall, ICOs and STOs could potentially change the way companies raise capital. It provides tons of options that can be mutually beneficial for both investors and issuers. This is all possible because of blockchain technology, which can automate processes and make finance more decentralized. 

Image sourced from Pixabay

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