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The world of cryptocurrency investing is rapidly evolving, with new fundraising models emerging all the time, such as ICO and STO. Initial coin offerings (ICOs) first captured investors' imaginations in 2017 as an alternative way to fund blockchain projects outside of traditional venture capital.
However, regulatory uncertainty surrounding ICOs meant that security token offerings (STOs) have since gained ground as a compliant capital-raising method. But what exactly is the difference between ICOs and STOs? Let's break it down in this complete guide!
An initial coin offering, commonly known as an ICO, is a fundraising event where a new cryptocurrency project sells digital tokens in exchange for funding.
These crypto tokens can represent access to a software application or service, investment in the project, or expected future functionality. People buy into ICOs with popular cryptocurrencies.
ICOs allowed startups and individual developers to raise money without meeting the strict requirements of an IPO or stock offering. Startups and individual developers publish a document called a whitepaper to lay out their vision and plans.
The lack of regulation also meant ICOs were open to participation from retail investors rather than just accredited investors in traditional funding rounds.
A security token offering (STO) is similar to an ICO but with crypto tokens that represent an underlying asset like equity, profit-sharing agreements, real estate, or other securities as defined by laws and regulations.
STO tokens are structured to confer ownership rights like traditional securities, rather than being focused on a specific use case or ecosystem alone.
You can explore "tokenization," “real estate tokenization,", and “RWA tokenization” for more details about crypto tokens and how they work.
Unlike ICOs, STOs require companies to verify investor qualifications and adhere to strict disclosure guidelines, much like a regulated stock offering.
STO projects undertake legal and regulatory processes like filing registration statements with the SEC to ensure compliance. Transparency and oversight are greater, but so too are the costs and complexity of launching an STO as opposed to an ICO.
In terms of the core mechanics, both ICOs and STOs involve creating tokens on blockchain technology and then selling a portion of them to early backers in exchange for funding, usually using popular cryptocurrencies or bank wires.
Projects publish whitepapers describing their concepts and may also host marketing campaigns leading up to and during their funding rounds. You can checkout “EURK whitepaper” for an example!
STOs provide several advantages over traditional ICOs. Firstly, they allow broader access to funding by opening up projects to both accredited and non-accredited investors.
Secondly, STOs offer a clear regulatory structure and enhanced investor protections through adherence to existing securities laws. Thirdly, security tokens can unlock liquidity by making private security ownership transferable.
While STOs provide much-needed regulation, they are also more complex and expensive to complete than initial coin offerings. Issuing and maintaining compliance with securities laws imposes substantial legal fees and costs.
STO investors must also qualify as accredited under varying state or country standards. This effectively bars participation for retail buyers and limits the investor pool.
Initial coin offerings (ICOs) allow innovative startups to raise funds quickly and cost-efficiently from a broad base of supporters with minimal regulatory requirements.
ICOs can build communities through easy participation and token ownership that grants access and influence in a project's growth. Success in fundraising also helps ICOs validate their concepts and gain publicity.
Unfortunately, the lack of regulation that once made ICOs so enticing also enabled many worthless or fraudulent token schemes that hurt investors and damaged the reputation of the entire sector.
Without proper disclosures or shareholder rights protection, participants had little recourse against opportunistic founders who mismanaged funds or failed to deliver on their vision.
Regulators globally have introduced new rules clarifying how crypto offerings fall under existing securities laws to protect the public.
Increased scrutiny of ICOs has led many projects to pivot towards STO models that comply with regulations. Some countries have banned ICOs outright but may allow compliant security tokens.
Transparency is crucial for building trust between investors and projects, regardless of the fundraising model used. Both ICOs and STOs rely on disclosures to reduce information asymmetry. Whitepapers and ongoing project communication keep backers aware of a crypto token offering's progress and changes.
To summarize the key differences, ICOs issue utility tokens without shareholder protections or regulatory oversight, while STOs issue security tokens as registered securities with all the rules and guidelines that entail.
ICO tokens may provide access to a service but hold no guarantees; STO tokens represent ownership in an underlying asset or project. ICO participation is unrestricted, but STOs can only sell to accredited investors.
Finally, due to their legal structure and compliance processes, STOs have higher upfront costs but offer investors greater clarity on their rights.
As unregulated offerings, ICOs do not restrict participation; anyone could buy into tokens during the capital-raising period. This democratized access to early-stage funding. However, a lack of oversight also left retail investors vulnerable to sophisticated scams.
STOs, on the other hand, qualify as securities offerings. Therefore, applicable regulations dictate that only accredited investors, as defined by agencies, may participate.
For startups raising funds, ICOs once allowed quick capital raises with low barriers to entry but lacked legal protections. STOs now provide a clear path for compliance but involve greater costs and complexity.
As an investor, ICOs could deliver outsized returns but offer few recourse options. STOs balance opportunity and security according to existing laws.
With adaptations like trustworthy and well-regulated security tokens, we can uphold transparency for the long-term sustainability of the industry.
Looking ahead, blockchain technologies will continue disrupting traditional finance and increasingly fall under regulatory purview.
Adaptability makes compliant tokenized crypto fundraising models all the more relevant for both small startups and large institutions. Already, blockchain has enhanced equity crowdfunding, and new mechanisms like DAOs are emerging.
Jurisdictions worldwide strive for the right balance of oversight that progresses both investor protections and permissionless innovation without stifling it. As regulatory clarity rises globally, the top STO platforms are sure to empower both investors and founders alike.
ICOs turbocharged crypto fundraising, but regulatory developments show the promising future lies with STOs. The addition of standard financial compliance may add complexity, but in the long run, it secures legitimacy and mass adoption.
With blockchain continuing to revolutionize capital markets, tokenized investing is undoubtedly here to stay. With transparency and oversight safeguarding buyers, STOs could open crowd investment to unprecedented scale.
It will be fascinating to watch tokenized capital-raising platforms develop in the years to come. EURK is the future of money in this aspect. You can experience security, reliability, and stability in this volatile nature of cryptocurrencies thanks to EURK and its 1:1 peg with euro currency.
EURK is a eur stablecoin that you can trust for your crypto transactions, and as a secure euro stablecoin platform, EURK promises many benefits for its users with the power of blockchain technology.
If you have a euro stablecoin wallet, you can directly buy EURK on secure crypto exchanges such as Coinstore, Bitay, and KoinBX. Join the euro stablecoin ecosystem with EURK today and take advantage of the stability of stablecoins and security of stablecoins. Become a partner and start to explore EURK!
