However, in the case of an ICO, full responsibility will fall on your shoulders. Choose the most suitable platforms for promoting your project depending on the type of fundraising and create a marketing strategy. Decide on launching an STO, ICO, or IEO based on your project specifications and preferences, and make sure to consult your advisors beforehand. Building an experienced and trustworthy team is another essential step when launching an IEO, ICO, or STO.
In general, regulators are more prone to accept STOs than ICOs, probably because they can be managed with the existing security laws. If you like to learn more, then enroll in our courses, take a cryptocurrency trading course, or book a free consultation to launch your own ICO or STO together with us. Also, make sure to follow us on Facebook, Twitter, LinkedIn, or YouTube for more advice. In one of our next posts, we will also cover the last option you have, the IEO (initial exchange offering) but as always, we keep things simple.
What Should You Choose: ICO or STO & Why?
The security coin investment itself is not more or less risky than a traditional investment – they both depend on the risks of the company and its business model. However, in the case of Security Coin Offering, there are additional blockchain-specific risks. If a token holder loses the key to their private wallet, they will also lose access to their investment forever. A Security Token Offering is a crowdfunding model for blockchain or any outfit with a digitized product or service. It is backed by law or the relevant securities provisions in the region where the startup is based. Due to this regulatory backing, investors get a level of protection for their investments.
- The broad oversight from regulators has made STOs a not-so-convenient venture for token issuers.
- STOs tend to be better investments than ICOs tokens, as they offer investors a greater degree of ownership and a share in the potential profits of the underlying asset or company.
- STOs, like typical IPOs, are classified as securities, but ICOs are classified as utilities, implying a shadier and less transparent structure.
- STOs are often marketed to traditional investors who are familiar with securities regulations and investment practices.
- However, STOs are subject to more regulation and are representative of some form of ownership.
Security token offering implies more direct access to the market and is simply cheaper (and faster) to hold. On the other hand, utility tokens are user tokens that enable future access to the products or services offered by a company. They help users get involved with a native platform or a DApp but are not considered an investment (though they can be one under certain conditions). Usually, utility tokens are valuable in the realm of one particular project. Basically, security tokens represent securities that are actual assets, like bonds, stocks, or property trusts. They are digitized versions of old-fashioned paper-based securities, fungible financial instruments that are linked to underlying investment assets.
Which is the better option: IPOs vs. ICOs vs. STOs?
ICO stands for Initial Coin Offering and is one of the most popular crowdfunding methods by far. Check out this guide on how to create a token sale for a more detailed step by step process. Simply go to Create Token Sale on Token Tool, fill in the parameters for your STO, and start your offering.
As records of ownership and project details are permanently and securely stored on the blockchain, investors can take advantage of more transparent information on the underlying asset. Additionally, STOs are regulated similar to any other security investment and thus sto vs ico guarantee higher investor protection. The fractionalization of ownership allows investors to address a larger number of investors and enables the creation of investment pools. Asset owners can thus partially sell their assets whilst keeping the majority of tokens.
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STOs on the other hand are fundraising methods that represent the tokenization of a company’s stock. Participating in an STO round may imply taking ownership of the company’s assets or other notable securities, for which a profit or dividend is paid out to the investors. The scope of the ICO and STO can be redefined by the issuing firm, albeit for the latter, all propositions must be backed by law. A novel technique of tokenization gave rise to the product known as STOs. The new type of tokens is very sought after because of the lower investment risk, ledger transparency, greater protection, and exchange flexibility. It’s important to remember that currently, just a small portion of the market issuing STOs.
Remember that you are working on your brand in the first place, so your project name should be well-known regardless of the product development stage. To launch your STO, ICO, or another fundraising campaign, you need advisors. They are as important as the core team members since they make a great impact on the project development throughout the whole journey. The trick is to find the right advisors long before the launch of an ICO, IEO, or STO.
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Such a form of fundraising usually gains much more trust than any other crowdfunding and, thus, leads to better outcomes. However, it is significantly harder to launch, too, due to strict regulations volved in launching an STO requires the assistance of experienced crypto token developers. An ICO is a crowdfunding method that involves the sale of digital tokens in exchange for other cryptocurrencies, typically Bitcoin or Ethereum. These tokens represent a stake in a new project or company and can be traded on cryptocurrency exchanges. ICOs are typically used to raise funds for a new blockchain-based project or cryptocurrency venture.
This means we may witness the symbiosis of utility and security tokens as well as of ICO and STO. In the beginning, God created the heaven and the earth, and ICO was a dream for crypto enthusiasts and product teams. Have an idea, a team, a website and a whitepaper and you are ready to issue tokens and raise money for your product. Young teams would not need a legal entity to start the big crowdfunding and raised millions of dollars over night without real obligations to investors.
For ICO
Not all utility tokens are securities but most are, and a security token can have a utility, but that doesn’t exempt it from getting regulated. Regulation A+ (Reg A+) is an alternative to a traditional IPO, which makes it easier for smaller, early-stage companies to access capital. With this Reg, one can issue securities to non-accredited investors and can raise up to $50,000,000 in the capital. And this method also takes up more cost and time for implementation on the ground. Equity tokens are similar to traditional shares as they contain the same information as a physical share certificate. The primary difference is that the information of equity tokens is recorded on the blockchain rather than in a share register.
Another major difference worth highlighting is the role of the issued tokens in both forms of the fundraiser. The digital assets being issued in an ICO typically represent a utility token that is central to the operations of a blockchain-based platform. The tokens could grant all accredited investors access to the protocol and its products or services. Unlike ICOs, STOs provide token holders with some form of ownership or equity over a tangible asset that belongs to the company; either in full or fractionalized. This way, investors can expect a profit via the STO’s revenue or through dividends. Simply put, the security tokens provided by STOs are an investment contract in electronic form, powered by blockchain and the smart contract system.
Bridging the gap between crowdfunding and regulation in blockchain
The Ethereum token sale in 2014 raised 3,700 BTC in the first 12 hours, which was equivalent to $2.3 million at the time. The money raised was utilized to turn Ethereum into a fully functional blockchain that isn’t reliant on Bitcoin. Before launching an ICO, a white paper outlining the project’s details must be released. Initial Coin Offerings (ICOs) are used to generate capital in the same way that IPOs are, but the commonalities end there.