Raising funds for projects can be a complex process. The cycle of pitch calls, decks, PR rounds, and the like sometimes never ends. This financial circus can be particularly hectic when trying to obtain money through conventional channels like IPOs. A private firm that has gone public needs to pass through a rigorous vetting procedure and even stricter regulatory requirements once the offering has been launched to raise money through public investors.
However, crypto provides alternative ways to raise funds through ICO, STO, and many other processes. Fundraising has also become global, open, and transparent. We will explore ICO & STO in detail with their differences.
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What is an ICO?
Initial coin offerings, or ICOs, have gained popularity in raising money in the blockchain and cryptocurrency sector. Interested parties can participate and purchase a new cryptocurrency token that a company has issued in an initial coin offering. ICO development can help you with the business’s goods or services or just be a stake in the company or project.
To get around laws, most ICOs disguise their products as utility tokens. Most creators and projects contend that consumers should receive tokens to access their native platforms or decentralized applications (DApps). The primary tenet of this argument is that their coin is intended for use rather than speculation. Such a justification enables ICO projects to circumvent regulation and require SEC or other stringent regulator registration.
What is an STO?
An investor exchanges funds for coins or tokens that reflect their investment in a security token offering (STO), although more restrictions and laws are in place. Investigating token listings, data sharing, and investor onboarding processes for STOs will be in-depth. An STO is just like an IPO in this regard. STO development is more complex and requires much time and effort because SEC is involved.
The token or securities in the STO are fungible and have some attached value. You cannot trade security tokens on a regular exchange because SEC allows its availability on particular exchanges. As government bodies are involved, STOs are 100% legal and follow several rules. The project or firm going for STO must do a lot of compliance work to launch it.
Usually, STOs have a KYC (Know Your Customer) process by which each investor has to register himself & reveal certain information to invest in STO.
Therefore, launching an ICO is much simpler than an STO. STO needs a lot of upfront compliance work on the part of the organization. While anybody can start and take part in an ICO (unless local laws prohibit it), only fully compliant businesses and accredited or at least well-known investors are allowed to sell and buy security tokens.
Difference Between ICO & STO
Following are some of the differences between these two fundraising methods:
- ICO is a technique in which firms or projects ask investors to purchase the tokens directly without legal implications. In STOs, the company offering the project has to go through a proper legal process to provide token sales.
- ICO was the first method launched in the crypto space to collect funds. On the other hand, STO has been introduced to counter the scams in the industry.
- Any firm can launch ICO, whether it is small or big. In STO, the firm must meet specific criteria before offering security tokens.
- ICO is unregulated, while STO is regulated by the SEC.
- ICO is riskier and can cause investors to lose a lot of money. On the other hand, STO is regulated and safe.
- The project or firm launching ICO offers products or services to the investors. However, the company launching STO offers tangible assets backed by its resources.
These two fundraising methods are replacing the traditional and costly method of IPO (Initial Public Offering). The blockchain sector is booming, and these methods offer small firms an opportunity to create valuable products for their investors. Professional investors prefer STO because it is less risky than ICO and less costly than IPO.
Despite their differences, ICO and STO are both accepted means of generating money for blockchain and initiatives of a similar nature, and both have advantages and disadvantages. Before investing, you must research where you want to participate and determine your risk tolerance.