Initial Public Offering (IPO) vs Security Token Offering (STO) vs Initial Coin Offering (ICO)
One of the most innovative applications of blockchain technology is the creation of new ways for entrepreneurs and investors to participate in funding startups. While some established companies still prefer the traditional route of going public through an Initial Public Offering (IPO), many emerging crypto and blockchain companies are exploring alternative models that take advantage of decentralised networks.
These models are known as Initial Coin Offerings (ICOs) and Security Token Offerings (STOs), and they have distinct advantages and disadvantages over IPOs in terms of legal implications, regulatory requirements, investor protection and potential returns. In this article, we will examine the key differences and similarities between IPOs, ICOs and STOs.
What is an IPO?
An IPO, or Initial Public Offering, is the process by which a private company sells its shares to the public for the first time.
An IPO can be a successful way for a company to access new sources of funding and growth opportunities, but it also requires careful planning and execution. It allows a company to raise capital from a large pool of investors, increase its visibility and credibility in the market, and create a liquid market for its shares. By going public, the company gives investors ownership and voting rights, as well as the opportunity to benefit from liquidity and dividends. The price of the shares may fluctuate after the IPO depending on the supply and demand in the market.
IPOs are typically done by mature and stable companies that have a large customer base and a proven track record. However, an IPO also involves significant costs, risks, and regulatory requirements. A company that wants to go public must prepare a detailed prospectus that discloses its financial performance, business model, growth strategy, and potential risks to potential investors to comply with strict regulations. The company must also list on a stock exchange and follow various requirements before, during and after the IPO.
What is an ICO?
An Initial Coin Offering (ICO) is a type of crowdfunding that uses cryptocurrencies to raise funds for a new project or venture.
In an ICO, a startup or an established company issues a new digital token or coin that represents some value or utility in their platform or network. The token or coin is sold to investors or supporters in exchange for other cryptocurrencies, such as Bitcoin or Ethereum, or fiat money, such as US dollars or euros. The investors or supporters hope that the token or coin will increase in value or provide some benefit in the future, such as access to a service, a share of profits, or voting rights.
ICOs have been used to fund various types of projects and ventures, such as decentralized applications (dApps), platforms, protocols, networks, ecosystems, and even social movements. Some of the most successful and well-known ICOs include Ethereum, which raised $18 million in 2014; Filecoin, which raised $257 million in 2017; and Telegram, which raised $1.7 billion in 2018.
ICOs are often compared to IPOs, where a company sells shares of its stock to the public for the first time. However, there are some key differences between ICOs and IPOs. For example, ICOs are usually unregulated and do not require the same level of disclosure and compliance as IPOs. ICOs also tend to be more risky and speculative, as there is no guarantee that the token or coin will deliver on its promises or have any intrinsic value.
What is an STO?
A Security Token Offering (STO) is a way of raising funds by issuing digital tokens on a blockchain that represent ownership rights in an underlying asset or business. These tokens represent securities, such as equity, debt, or other assets, that are regulated by the relevant authorities.
STOs are often used by startups or projects that want to tap into a global market of investors and provide them with more transparency, security and flexibility. Unlike Initial Coin Offerings (ICOs), which are largely unregulated and often based on speculative promises, STOs are subject to securities laws and regulations that aim to protect investors and ensure transparency.
STOs can offer various benefits to both issuers and investors, such as lower costs, faster transactions, global access, and enhanced liquidity. By buying the tokens, investors get rights to future profits, dividends, or interest payments, as well as the option to trade them on secondary platforms. STOs combine the advantages of blockchain technology and tokenization with the legal framework of securities.
However, STOs also face some challenges and risks, such as legal uncertainty, technical complexity, market volatility, and cyberattacks. Therefore, anyone who is interested in participating in an STO should do their due diligence and understand the potential rewards and pitfalls of this emerging form of financing.
How do IPO and STO compare?
The main difference between IPOs and STOs is the way they use technology to distribute and manage securities. While IPOs rely on intermediaries such as underwriters, brokers, and exchanges, STOs use smart contracts and decentralized platforms to automate and streamline the process. This reduces the costs, risks, and barriers for both issuers and investors. However, STOs also face challenges such as regulatory uncertainty, lack of standardization, and low awareness among the public.
In particular, there are several differences between IPO and STO in terms of cost, time, access, liquidity and risk:
- Cost -> An IPO is typically very expensive, as it involves hiring underwriters, lawyers, auditors, and other intermediaries. It also requires paying fees to regulators and exchanges. An STO is much cheaper, as it eliminates or reduces the need for intermediaries and fees. It also leverages blockchain technology to automate and streamline the issuance process.
- Time -> An IPO can take several months or even years to complete, as it involves a lot of preparation, documentation, review, and approval. An STO can be done much faster, as it requires less paperwork and bureaucracy. It also benefits from the speed and efficiency of blockchain transactions.
- Access -> An IPO is usually limited to institutional investors and accredited investors who meet certain criteria of income or net worth. An STO is more inclusive and democratic, as it allows anyone with an internet connection and a digital wallet to participate. It also enables global reach and exposure, as the tokens can be traded across borders and jurisdictions.
- Liquidity -> An IPO results in shares that are traded on a stock exchange, which provides liquidity and price discovery. However, there may be restrictions on when and how the shares can be sold, such as lock-up periods or insider trading rules. An STO results in tokens that are traded on a digital platform or a secondary market, which also provides liquidity and price discovery. However, there may be limitations on who can buy or sell the tokens, such as KYC/AML checks or whitelisting procedures.
- Risk -> An IPO involves a high level of risk for both the company and the investors. The company faces the risk of not meeting the expectations of the market or the regulators, which can lead to legal issues or reputational damage. The investors face the risk of losing money due to market volatility or fraud. An STO also involves a high level of risk for both the company and the investors. The company faces the risk of not complying with the regulations or the token holders' rights, which can lead to fines or lawsuits. The investors face the risk of losing money due to technical glitches, hacking or scams.
How do IPO and ICO compare?
IPOs and ICOs are two ways of raising funds for a company or a project. Both methods have advantages and disadvantages, depending on the goals and needs of the issuer and the investors. Some of the main differences between IPO and ICO are:
- Regulation -> IPOs are highly regulated by authorities such as the Securities and Exchange Commission (SEC) in the US, which require issuers to disclose detailed information about their financial performance, business model, risks, and governance. ICOs are largely unregulated and do not have to comply with such requirements, which makes them more flexible and faster to launch, but also more prone to fraud and scams.
- Access -> IPOs are usually restricted to accredited investors who meet certain criteria of income or net worth, while ICOs are open to anyone who has access to the internet and a cryptocurrency wallet. This means that ICOs can reach a wider and more global audience, but also expose investors to more volatility and uncertainty.
- Liquidity -> IPOs create liquid markets for the shares of the company, which can be traded on secondary markets such as stock exchanges. ICOs create tokens or coins that can be traded on decentralized platforms such as crypto exchanges or peer-to-peer networks. However, the liquidity of these tokens or coins depends on the demand and supply of the market, which can vary significantly depending on the popularity and success of the project or network.
- Returns -> IPOs offer investors the opportunity to share in the profits and growth of the company, as well as to receive dividends or other benefits. ICOs offer investors the opportunity to benefit from the appreciation of the tokens or coins, as well as to use them for accessing the services or features of the project or network. However, both methods involve risks and uncertainties, as there is no guarantee that the company or the project will succeed or deliver on its promises.
In conclusion, each of these funding methods has its own unique advantages and disadvantages.
For example, while IPOs are typically only available to established companies with a solid track record, both ICOs and STOs are often open to a wider range of companies, making them ideal options for startups or companies seeking funding on a smaller scale. Additionally, IPOs and STOs are often more regulated than ICOs since they involve the creation of security tokens.
Overall, the choice of the right fundraising method will depend on the specific needs and goals, as well as the regulatory climate in the industry.