Initial Coin Offering (ICO) has become a very popular method of crowdfunding recently. During a few years, a great number of funds were raised by means of ICO. It helped many startups, their teams and investors gained success and realized amazing ideas. But also participants of ICOs faced the risks connected with investments in scam projects. That’s why the new instrument such as the Security Token Offering (STO) appeared.
During the ICO the utility tokens are issued. By buying the utility tokens the investors acquire access to the products or services in the future and teams attract the funds for the finance of their blockchain developments. Utility tokens are purchased exclusively for internal calculations, the exchange between users, fees for the provided functions of the software, and so on. Investment is required to simplify the use of the service.
So what is Security Token Offering? STO means the emission of digital assets in accordance with requirements on securities legislation. In 2017 the SEC stated that security tokens fell under the regulation applicable to standard shares, i.e. the release of tokens must be registered mandatory. For one side, the security tokens provide a higher level of protection for investors and reduction of regulative risks for emitents. The holders of security tokens have the right on dividends or voting power. From the other side, security tokens require higher costs for the issuer, as STO is a type of private placement of securities, while ICO is only one type of crowdfunding.
The issuing of security tokens consider the range of requirements that should be met. First of all, the emitent must understand the legislation of chosen jurisdiction. There are a set of documents issued by SEC regarding the STO. The only high professional lawyer can understand the difference between Regulation A or Regulation S and so on. The emitent should be ready for the higher costs on legal services, as well as compliance. The KYC / AML procedure with such type of placement will consist of several stages. All accredited exchanges strictly require these procedures during placement of security tokens. Also, SEC requires that every investor should be checked and has the status of the accredited investor. These aspects make the fundraising much more difficult compared with a similar process during ICO. STOs and ICOs target a different audience, as only professional investors can participate in such placements. So, STO and ICO are two different investment attraction mechanisms aimed for different situations.
One more fact is that the STO requires a different marketing strategy compared with the ICO. The marketing during the ICO is based on attracting and building the community in social media. While the participants of STO are a professional investor, that’s why the marketing should be more complicated as well as more expensive.
The infrastructure for listing the security tokens are not formed yet. There are few licensed trading platforms where the security tokens can be placed. That’ why the utility tokens issued during ICO are more liquid than security tokens.
STO guarantees a higher level of security for investors as such tokens must be registered in SEC, so it avoids the possibility of scam projects. ICO can’t provide such guarantees for investors, but they have the low level of entry allowing investors with a different range of incomes take part in the projects. STO considers a higher level of entry that’s why the range of investors is less.
STO consider an opportunity for companies in the real sector of the economy, which are not connected with blockchain technology. Esspecialy STO can be attractive to the medium business that can not incur expenses on traditional bond issuing.
To sum up, ICO and STO have their advantages and disadvantages. The most sufficient differences between ICO and STO are:
STO provides a higher level of security for investors than ICO;
ICO allows to attract a wider range of investors as they have a lower level of entry;
STO requires much more expenses for legal services. KYC/AML as well expenses on tokens issuing;
The expenses for marketing are less during ICO than STO. Also, marketing strategy during STO is much more complicated.
STO can be an effective way of project development in future as it is very reliable and needs the implementation of serious instruments. But nowadays it is very hard for teams to meet the SEC requirements and run the STO itself. The market of STO should form all necessary conditions for projects. ICO instruments are clearer and easier now, that’s why more teams still choose this way of crowdfunding for project development.
During the ICO the utility tokens are issued. By buying the utility tokens the investors acquire access to the products or services in the future and teams attract the funds for the finance of their blockchain developments. Utility tokens are purchased exclusively for internal calculations, the exchange between users, fees for the provided functions of the software, and so on. Investment is required to simplify the use of the service.
So what is Security Token Offering? STO means the emission of digital assets in accordance with requirements on securities legislation. In 2017 the SEC stated that security tokens fell under the regulation applicable to standard shares, i.e. the release of tokens must be registered mandatory. For one side, the security tokens provide a higher level of protection for investors and reduction of regulative risks for emitents. The holders of security tokens have the right on dividends or voting power. From the other side, security tokens require higher costs for the issuer, as STO is a type of private placement of securities, while ICO is only one type of crowdfunding.
The issuing of security tokens consider the range of requirements that should be met. First of all, the emitent must understand the legislation of chosen jurisdiction. There are a set of documents issued by SEC regarding the STO. The only high professional lawyer can understand the difference between Regulation A or Regulation S and so on. The emitent should be ready for the higher costs on legal services, as well as compliance. The KYC / AML procedure with such type of placement will consist of several stages. All accredited exchanges strictly require these procedures during placement of security tokens. Also, SEC requires that every investor should be checked and has the status of the accredited investor. These aspects make the fundraising much more difficult compared with a similar process during ICO. STOs and ICOs target a different audience, as only professional investors can participate in such placements. So, STO and ICO are two different investment attraction mechanisms aimed for different situations.
One more fact is that the STO requires a different marketing strategy compared with the ICO. The marketing during the ICO is based on attracting and building the community in social media. While the participants of STO are a professional investor, that’s why the marketing should be more complicated as well as more expensive.
The infrastructure for listing the security tokens are not formed yet. There are few licensed trading platforms where the security tokens can be placed. That’ why the utility tokens issued during ICO are more liquid than security tokens.
STO guarantees a higher level of security for investors as such tokens must be registered in SEC, so it avoids the possibility of scam projects. ICO can’t provide such guarantees for investors, but they have the low level of entry allowing investors with a different range of incomes take part in the projects. STO considers a higher level of entry that’s why the range of investors is less.
STO consider an opportunity for companies in the real sector of the economy, which are not connected with blockchain technology. Esspecialy STO can be attractive to the medium business that can not incur expenses on traditional bond issuing.
To sum up, ICO and STO have their advantages and disadvantages. The most sufficient differences between ICO and STO are:
STO provides a higher level of security for investors than ICO;
ICO allows to attract a wider range of investors as they have a lower level of entry;
STO requires much more expenses for legal services. KYC/AML as well expenses on tokens issuing;
The expenses for marketing are less during ICO than STO. Also, marketing strategy during STO is much more complicated.
STO can be an effective way of project development in future as it is very reliable and needs the implementation of serious instruments. But nowadays it is very hard for teams to meet the SEC requirements and run the STO itself. The market of STO should form all necessary conditions for projects. ICO instruments are clearer and easier now, that’s why more teams still choose this way of crowdfunding for project development.
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