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Once touted to be the best alternative to initial public offerings (IPOs), initial coin offerings (ICOs) are now in the end phase of the product life cycle. ICOs have suffered more from its own drawbacks and increasing popularity among scammers than gaining favor from positive factors.
But, despite the ICO becoming a short-lived method for raising funds, it paved the way for a completely new model for projects to issue and sell tokens, which is more efficient and robust.
This new model is known as the initial exchange offering (IEO). The concept first took place back in 2017, when ICOs were riveting the market, but gained popularity only in the beginning of 2019. Another form, which is also acquiring significant interest from investors, is the security token offering (STO). The two differ, as the former is the more efficient version of ICOs and the latter deals with asset tokenization.
First, let’s go ahead with the IEO, understanding how it works and its advantages. Initial exchange offering, as the name suggests, is conducted on a cryptocurrency exchange platform, and acts as the counter party to the fundraising program.
Coins of a selected project are pre-mined and listed on the exchange that will conduct the initial offering. As per the agreement between the exchange and the project, the IEO has a cap on the fundraising amount, the fixed price of the token, contribution per individual, etc.
In an IEO, the participant directly purchases the token from the exchange, whereas in ICOs, the participant needs to make the purchase by sending the requested cryptocurrency to a smart contract governing the ICO.
How are IEOs more efficient than ICOs?
First and foremost, there are far lesser risks connected with IEOs compared to ICOs. One of the main advantages of IEOs is the increased level of trust and security.
In order to an IEO to be listed on a well-recognized cryptocurrency trading platform, the exchange first scrutinizes the project in depth to rule out any possibility of scams and dubious projects attempting to raise funds.
The vetting process brings a level of trust to investors seeking to invest in the crypto project. Whereas in ICOs, everything is controlled by the project team, and the transparency of the project always remains in question with the risk of getting scammed significantly higher.
How are IEOs beneficial for projects?
For projects, it becomes a lot easier to raise funds with flawless execution during the initial offering of its coin. For any crypto project, after the conclusion of the ICO phase, the main hurdles come trying to get the coin listed on any cryptocurrency exchange, and failure to do as planned can significantly erode investor confidence, thus affecting the project and sector negatively.
Other benefits Include:
- Easier KYC/AML process compliance, as the process is handled by the crypto exchange platform
- Can tap the large client base of the exchange to subscribe to the IEO
- Can widen its marketing reach by associating with an established crypto exchange platform
This model of fundraising is popularized by the Binance Launchpad IEO platform, which was introduced in 2017 and became mainstream in 2019. Since then, more exchanges and new platforms have emerged to conduct IEOs such as Huobi Prime, OKEx Jumpsmart, Bittrex International, Priority Token, etc.
Security token offering (STO)
Security token offerings are also an extension of ICOs, but are bit different from IEOs as mentioned earlier. With an STO, an investor is issued a crypto coin that represents their investment in the traditional asset. Traditional assets can be stocks, bonds, REITs or any other public security that is traded on a stock exchange.
You might have heard the term “security token” or “tokenized security”, which means the tokenization of an existing financial assets. But in an STO, you don’t tokenize existing financial assets. Instead, you create new security tokens.
How does an STO work?
The advent of decentralized finance has helped many businesses to tap finances through the issuance of security tokens on the blockchain without relying on traditional financing sources.
An STO launch process is divided into four stages:
- STO for accredited investors
The Preparation Phase
To prepare, you’ll need to come up with an STO plan, consult legal advisors, create a white paper explaining all the technical aspects of the security token and how it will gain value, and create a marketing website.
As Artur Boytsov, vice president of ICO/STO consulting agency Priority Token, puts it,
“It’s essential for any project looking for investors to have a clean website and detailed documentation (e.g., white papers, technical papers, token economic analysis, etc.) on how the project can succeed and why the associated token will increase in value.”
The pre-STO phase
It involves marketing the STO, choosing an exchange platform, appointing a custodian for your collateral assets for the security token, and creating the security token.
The third phase
This phase is also regarded as the main stage of the whole process: the STO gets released for a crowd sale or it sells the token to the public through the appointed exchange. This stage also involves setting up community support services on crypto forums to offer assistance by using different social media platforms.
The fourth stage
Post-STO is the crucial step for the success of an STO. It involves project development and completion, for which the STO was held, reaching investors’ expectations and offering technical support to the public.
How do STOs differ from ICOs?
The main difference is the regulatory governance of an STO and its intention to offer a security token under securities laws. Whereas, the scope of ICO coins, as asserted, is for usage and not investment purposes, which helps the project circumvent legal restrictions and strict securities laws.
For this reason, barriers to entry for conducting an STO are higher and required more stringent compliance with regulations, marking it as a safer investment instrument, compared to ICOs.
Advantages of STOs
STOs offer a host of advantages for users and projects, compared to traditional IPOs. STOs are touted as the future of the financial market and can be a game changer for the sector.
STO transactions are cheap, compared to traditional assets, as they eliminates middlemen and financial institutions, such as banks, brokerages and settlement agencies.
STOs also promote fractional ownership, which is not allowed in any trade of any traditional asset. Plus, they can be traded 24/7, bringing additional liquidity to the secondary market.
Although cryptocurrencies have failed to catch up to the sheer size of the traditional financial market, facing regulatory barriers, the sector is rapidly evolving.
The emergence of IEOs and STOs as the most preferred methods for raising funds, over the old ICO method, is the right path. With greater transparency, greater regulatory clarity and lower risk, IEOs and STOs will take the crypto ecosystem to new heights.