What is the difference between an ICO, IEO and STO?
Jul 14, 2019
There is a huge hype right now that the security token offering (STO) is the new form of initial coin offering (ICO), but did you know that there is a new form of blockchain-based fundraising on the rise?
Yes, say welcome to the initial exchange offering (IEO). This detailed guide will highlight the major differences between these fundraising methods and why one would be more beneficial over the other.
So, let’s get started already!
What is an ICO?
Initial coin offering (ICO) is, or maybe was, a very popular crowdfunding method among crypto investors. It’s an effective way of funding a new product or service in the crypto world, say a new coin or an app.
ICO is not quite different from IPO (initial public offering) that is often used by companies venturing into the stock market.
An ICO works by issuing digital coins or crypto coins against investments. They are sold directly to investors at a discount. Just like the stock markets, investors gain profits if the tokens increase in value from the initial launching price.
Pros of an ICO
It is easy to initialize and set up an ICO project. All you need is a white paper, product website, and a backup team to handle the technicalities of the project.
Lower launching cost, hence suitable for startups and amateur investors.
The fundraising process is simple and less cumbersome as compared to IEOs and STOs.
Lesser government intervention, hence preferable for small timers.
More liquidity within a shorter period.
Investors have full control over their funds.
Multiple fundraising programs like private sales, public sales and airdrops.
Cons of an ICO
The fundraising system is susceptible to security threats like scams and fraud.
ICO is not preferred for long-term investments.
What is an IEO?
Technically speaking, an initial exchange offering (IEO) is just a new form of ICO, but the difference comes in on the platform where the token or coin is offered. As the name suggests, an IOE fundraising offers coins through a partnering crypto exchange as opposed to directly dealing with investors.
Anybody can participate in a public ICO, but in an IEO, the tokens are sold exclusively to members of the exchange. However, it’s not a difficult process to join an exchange that offers the tokens if you’re interested in investing in the new coin.
Sometimes, it’s even easier investing through an IEO than an ICO. Instead of following specific guidelines that are unique with each ICO offering, the exchange will standardize the process for all offerings, making it less tedious for the users to invest in different coins.
Pros of an IEO
All participating exchanges are KYC/AML verified to ensure better security for the investors.
Investors work directly with the exchange.
The regulatory levels make the platforms trustworthy in terms of protecting investors from fraud.
Participants transfer their funds directly to their accounts and not to a smart contract.
Cons of an IEO
High cost of fundraising and difficulties in setting up the system.
Low liquidity level as compared to ICO and STO.
Investors have little control over the activities of the exchange.
What is an STO?
Security token offering (STO) is a more complex form of fundraising that is a little more difficult to implement than ICOs. STOs work by issuing an investment contract backed by security tokens and recorded on a blockchain platform.
With an STO, the security coin is asset-backed and contains the ownership information of the investor, which is recorded digitally on the blockchain. It’s more of a digital certificate, the same way you’d have a certificate for bonds and stocks in exchange for your investment.
Pros of an STO
An STO complies with government rules since it deals with real assets, making it a trusted investment tool.
More secure and effective for long-term investment.
Cons of an STO
High fundraising costs and relatively complex to execute.
Cross-border investment is difficult due to strict regulations.
Low liquidity due to stringent government regulations.
IEOs have significantly mitigated the legal risks associated with ICOs though the liquidity is lower. STOs, on the other hand, provide a more secure platform for serious investors who don’t want to leave their investment at the mercy of exchanges.
That said, whichever fundraising method you choose, always remain cautious and do thorough background research about the coin offering.