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STOs vs ICOs vs IPOs: The Differences Explained

09/06/2021
STOs vs ICOs

STOs vs ICOs vs IPOs: The Differences Explained

Sep 6, 2021

Tokenization is a concept you may be familiar with, especially if you like to dabble into subjects such as finances, security token vs utility token, or blockchain industry. A blockchain token represents a real asset. This process is called tokenization. As a starting point, blockchain fundraising methods offer several advantages compared to the traditional methods, including better management and distribution of funds. As we compare STOs and ICOs, we will discuss the advantages and disadvantages they come with.

STO vs ICO

Amid legal concerns regarding ICOs, a new kind of token offering emerged: security token offerings (STOs). Despite being a hot topic, security token offerings are still mostly unknown. How about getting to the root of the matter, or better said, defining STO vs ICO: What is a security token offering definition, anyway? How does it differ from an ICO?

Let’s find out.

Security Token Offering Definition

Securities Token Offerings, or STOs, are similar to ICOs. However, they are regulated. An ICO was inadequately transparent, hence the creation of an STO. The purpose of all of it was to bring more regulations to blockchain-based crowdfunding and allow for more guarantees regarding raising funds via tokenized assets issued on the blockchain.

Initial Coin Offering Definition

Let’s move on to the Initial Coin Offering Definition. In the blockchain ecosystem, Initial Coin Offerings were the first method of crowdfunding. Using this fundraising method, anyone from anywhere could invest in a company or project. ICOs are also known as the cryptocurrencies version of Initial Public Offerings. With this method, investors will receive utility tokens as payment for their investment. A company will use these tokens to provide future access to its products or services.

STOs vs ICOs Differences

What are the main differences between ICO and STO? In the Blockchain age, an STO would be akin to an IPO. The requirements are more stringent than for ICO but not as very demanding as for IPOs.

Similar to ICOs, STOs are instruments for distributing tokens, but they are regulated. As opposed to this, ICOs are highly unregulated. Considering that STOs are registered with all the required governmental bodies and meet all legal requirements, many regard them as totally legal.

The fact that STOs are regulated makes them more attractive to investors than ICOs. Additionally, STOs have already had a significant impact on many businesses, and, likely, they will eventually replace ICOs. And finally, STOs do not carry the risk of fraud or illegal activities like ICOs do.

ICO
STO
A less regulated industry
Launch costs are lower and easy to set up
Investing is available to everyone
Fraud or illegal activities are possible
You will receive a token
A highly regulated industry
Expenses are higher
Investors with accreditation only
Secured with minimal risk of fraud
You become the owner

STOs vs IPOs

Security token offerings and Initial Public Offerings might sound similar. However, there are significant differences between them. Simply put, they are both ways to raise public funds using tangible assets. Take a moment to learn more about Initial Public Offerings and discover the differences between STOs and IPOs.

Initial Public Offering Definition

This is one of the oldest and most popular forms of fundraising as a company moves from being a private company to being public through an initial public offering (IPO). An IPO involves a company selling shares to institutional investors before trading them on a stock exchange. The public offering of shares is a means for companies to raise investment capital.

STOs vs IPOs Differences

In terms of their objective and effect, IPOs and STOs are identical. Each case involves the raising of capital in return for security. Ideally, it should be equity, preferred stock, bond, or any other security that gives rights to income and claim on the issuing company’s assets in the form of debt or liquidation equity.

What makes security token offerings different from public offerings under current regulations? Do STOs have any advantages over IPOs?

An STO differs significantly from an IPO regarding the parties involved, the structure, technology, and cost. In an IPO, a lot of intermediaries, such as agents, may play a role. However, it is more important to note that the core service providers and their subjective judgment will determine the success of an offering. Small- and medium-sized companies do not benefit from IPOs for this reason. These are meant as an exit strategy only for companies with sufficient size and scale.

Both types of public fundraising involve financial instruments. IPOs offer investors the opportunity to buy shares of a company representing a percentage of it, with dividends and liquidation rights attached. STOs involve investors buying tokens that are also equity in a company, with rights to dividends, liquidation equity, and voting rights. STOs, however, can tokenize your assets and businesses as long as they pay interest and repay principal over time.

STO
IPO
It is heavily regulated
A more expensive option
Investors must be accredited
A secure environment
You become the owner
Anti-fraud measures
The registered assets are real
Securities market incorporated
Usually for established companies
It requires a lawyer, a bank, and patience
There is a legal procedure to follow
Ownership stake in a company’s future earnings
A less secure environment

Bottom Line

IPOs, ICOs, and STOs give companies and businesses new ways to raise money through the tokenized economy. To succeed, companies need to raise funds, but determining which method to use can be complex.

While ICOs provide almost complete liberation of a source of funds in most jurisdictions, the regulations surrounding IPOs offer a greater level of credibility. In some respects, STOs are the same as IPOs, with blockchain technology serving mainly as a differentiator.

To achieve a balance between retaining the regulatory assurances of traditional securities and leveraging the flexibility and efficiency of innovative technologies such as blockchain, one must always strive for a middle ground.

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