In ICO vs IPO vs STO vs IEO, we hear about what each fundraising instrument is and how it works.
Initial Coin Offering (ICO)
Initial Coin Offers (ICOs) are also used to raise funds, including IPOs, but that is almost the end of the parallels. The crucial differences are that tokens are issued that do not include equity rights, while blockchain is used as a distribution tool. ICOs involve the development of new tokens distributed in exchange for cryptocurrencies and fiat to investors. The token typically offers a kind of utility within the product or service that the issuer offers or other rights that do not fully reflect traditional equity rights.
To establish an ICO, a white paper must be published which explains how the project will be carried out. It offers start-ups the opportunity to raise capital without the barriers levied by conventional IPOs, as well as with no restrictions on the form of investors that can participate because usually, ICOs are also open to retail investors.
There are various advantages associated with ICOs, particularly because they are essentially unregulated in most jurisdictions, except for generally applicable regulations including anti-money laundering laws. Using blockchain ensures that the process is simpler as tokens are automatically distributed, which makes it easier to collect funds quickly. Nevertheless, the lack of regulation has reportedly led to several ICO scams, which over recent years has led to poor credibility.
So Who Can Launch an ICO?
Anybody, literally! There is very little oversight currently on ICOs in America, which ensures that as long as the technology is in operation, you will be free to try and finance the currency. Crypto-monetary law as a whole is just like the wild west, gold and very little regulation are in the woods. This can work for you or it can lead to swindling. An ICO is potentially one of the simplest fundraising ways to set up as a scam. Since no regulation exists, nothing stops somebody from doing all this work to make you think that they have a great idea, and then get away with the money.
Initial Public Offering (IPO)
Initial Public Offerings (‘ IPOs’) include selling publicly-owned shares by issuing new shares involving the transformation of a private company into a public enterprise. Usually, a shareholder is named and the shares are listed on an exchange. Through means of IPOs, businesses can tap into a pool of public investors that provide liquidity. The prospective shareholders obtain a stake in the company in exchange for their contribution. Also, IPOs can be transferred through the EU and EEA since they are governed by EU law.
Some of the benefits of IPOs, therefore, include capital increase, business growth, transparency, and increased liquidity potential by a secondary listing. These are, however, heavily regulated and therefore more costly than other ways of raising funds. The organization is also exposed to competitive risks as confidential data, including financial and tax information, must be made publicly available. In turn, leverage is lost when new shareholders gain voting rights, essentially reducing the power of existing shareholders in the decision-making process.
The IPO price is usually determined by the underwriters in the first instance via their pre-marketing process. At its heart, the IPO price is based on the company’s assessment using basic technology. The most popular strategy used is discounted cash flow, the net present value of the projected future cash flows of the business. This value is considered per share by undertakings and potential investors. Certain pricing approaches include equity value, business value, equivalent corporate modifications, and more. The companies contribute to demand, but also usually reduce the price to ensure success on the IPO day.
The basic and technological aspects of an IPO issuance can be quite difficult to analyze. Investors will look at headlines for news, but the main source of information should be the prospectus available until-1 Registration is filed by the company. The leaflet provides a lot of useful information. The management team and its statements should be given special consideration by investors, as well as the nature of the undertakings and details of the contract. Successful IPOs are usually supported by large investment banks that can promote a new problem.
Security Token Offering (STO)
Security Token Offerings (STOs) have both IPO and ICO features. While tokens or coins are issued on a blockchain, tokens are classified as securities as they usually represent underlying assets such as stocks, bonds or funds. Because of their origin as shares, it is governed by existing securities laws such as the Financial Instruments Markets Regulation, the Financial Instruments Directive, the Prospectus Directive, and the European Union regulation transparency directive.
While regulation offers higher credibility than ICOs, the process is long and demands more due to the applicability of conventional securities legislation. That being said, STOs are still cheaper and the process is quicker than IPOs using blockchain technology. STOs are usually passport able through EU and EEA member states, as are IPOs. Nonetheless, protection tokens are currently faced with the problem of low liquidity, as security tokens have not previously been listed in major exchanges because of their new technology.
STOs are perceived to be lower than an ICO because security tokens ‘ securities laws often impose transparency and accountability. A protection token will also be backed by a real-world asset, which makes it much easier to determine whether the token is fairly priced concerning the underlying property. It can be difficult to determine the true value of a token with only utility tokens and whether it is reasonably priced or not.
In comparison with traditional IPOs, an STO is cheaper because intermediaries like banks and brokerages are removed. Intelligent contracts eliminate dependency on attorneys, while the need for paperwork decreases blockchain. This not only makes the entire process cheaper but also quicker.
Initial Exchange Offering (IEO)
Initial Exchange Offerings are the next step in ICO development for many people in crypto space. When ICOs are unregulated and most of them have been scams, STOs should be a workaround. Nonetheless, slow and expensive procedures and stifling legislation constrain most STOs. IEOs are the middle ground which deals with both sides of the problem.
Although exchange-aided ICOs were something for some time, IEOs began gaining momentum at the end of 2019 after the launch of Binance Launchpad. In 2019, there were already more than 50 IEOs, which earned more than 159 million dollars, according to ICObench.
IEOs just try to promote legal ventures because it puts the integrity of trade at stake. The vetting process is therefore deeper. Therefore, not every concept manages to get exchange help. Also, exchange offers are more accessible than STOs, allowing virtually anyone to take part and invest freely (except for countries with regulatory restrictions, see below) and the token sales team is less likely to suffer from regulators due to compulsory KYC / AML bonded investment checks.
Essentially, IEOs are another way to fund various cryptocurrency startups via a cryptocurrency exchange that acts as a mediator. With the aid of cryptography exchange, projects will increase exposure, interest, and reputation significantly. The token issuers shall pay a listing fee together with an agreed amount of tokens for the use of IEO network services following a successful IEO. The tokens are soon listed on the exchange where investors can gain instant liquidity.
Like ICO tokens, however, IEO coins are already stamped before the crowd sale. However, several days or weeks after their IEO, they swap, making them more attractive for investors (instant liquidity). The IEO method often necessarily includes an intermediary (the IEO platform) who is responsible for managing the funds. But that also helps to build investor confidence in the project, which is lacking in most ICOs.
Which is the best option?
The raising of funds is a critical step for several businesses, but it can be a complicated process to determine which method of employing. Having said that, it is difficult to determine objectively the most successful way to raise the funds themselves. Although ICOs offer almost full liberalization and nearly unregulated sources of funding in many jurisdictions, they are not as credible as highly regulated IPOs.
In the end, one must always try to strike a balance between the regulatory guarantee of conventional securities and the versatility and productivity of innovative technology like Blockchain.