Differences Between ICO – IEO – STO | Beginer’s Guide 2022
In the ever-changing world of cryptocurrencies and blockchain, there have been massive revolutions. Terminologies such as ICOs, IEOs, and STOs have designated a significant change within the financial sector, opening the market to new opportunities and democratizing investments for a population that does not use traditional systems.
Amidst this growth, there is a lot of confusion between investors. What does each terminology mean or does each provide added security than the other? Are the collection mechanisms within each cryptocurrency the same? They are all valid strategies that surely many may utilize before this sector of cryptocurrencies.
What are ICO’s?
The term ICO stands for Initial Coin Offering. They were the first component to enter the market and have since then been presented as a very useful mechanism for the sector. Cryptocurrencies such as IOTA, Neo, and Ethereum have managed to obtain the monetary funds that are important to develop the projects.
Authorities of the financial sector have made several policies to regulate the flow of ICO. However, the market still operates with very little interference from the government. This indicates that the developers do not follow any regulatory framework or a protocol within the legislation to trade in tokens. White Paper is the only documentation that they present which entails detailed information regarding the aspects of the project. This can include a roadmap of the project, the financial aspects, advertising costs, and much more.
So what does an investor get from an ICO? Investors in an ICO are making an acquisition of a token early which is different from an IPO. The respective token will have a precise utility within a specific platform that is developed by the representatives of the ICO.
How is it possible for an investor to make money within an ICO? In order to dodge the respective legal regulations to the investment market, the developers of the project defend at all costs that the acquisition of tokens in this phase is not exactly an investment.
The investor gets the chance to make an acquisition of the token. He does this in anticipation of the money he will earn, hoping that the platform where he has invested money will bring him a good return. These go beyond using the token in a system as he will look for the currency to be in greater demand than its supply. This will further affect the price of the asset.
The lack of governance in the ICO market is complicated, and this has caused many investors to lose their money. Several unfinished projects have been previously published as white papers, and this has led to an added fear for the investors.
Along with this, we see that not many investors actually understand the fact of investing in an asset that does not yield a fixed profit, and the same happens with the shares of a company that is received through the different stock exchanges present throughout the world. all over the world.
Will you have any rights directly to the company if you invest in an ICO? The answer is not directly with the company that is behind the ICO as it is a different legal entity that was established way before the investments were launched across the market. Nevertheless, it is possible to see several cases in which the holders of the tokens have a certain management capacity within the project if it is constituted as a Decentralized Autonomous Organization.
A Decentralized Autonomous Organization is a form of special structure that exists within the cryptocurrency market. This will actively allow token holders to make decisions about the future of the company. Several decentralized autonomous organizations that are formed after an ICO allow the users of the acquired tokens to determine in which elements of the money that has been collected during the ICO itself will be spent.
What is an STO?
The cryptocurrency market is one with very little regulation, and large investors are still not satisfied with investing their money inside Initial coin offerings. So it is represented as a very risky operation for those who look to get back their money from investments.
As a response to such a situation, many developers presented the idea of making a Security Token Offering and the proposal was to combine ICOs and IPOs in a single presentation.
From the ICO point of view, the STOs would offer token holders dividends from the profits obtained by the company behind the STO during its years of function.
On the side of the Initial coin offering, the STOs look to demonstrate the utility that the Blockchain can have to offer a more transparent and efficient system. This is quite different from the current system they use within the markets.
Evidently, it is indicated that they are bound by a number of legal regulations and policies that do not apply to ICOs. Public accounting records that are being controlled by the financial authorities and many other elements of the companies that are listed on the stock market are now striving to apply to projects linked to cryptocurrencies and Blockchain.
Does this mean that all STO’s will give rights over the direction of a company? This is something that causes a lot of confusion within the Security token offering market since by offering a dividend to the holders, it is believed that the possession also implies an automatic right to the direction of the company.
The power that the holder of the token will have, will completely depend on if the DAO is formed on the ICO or STO project. If there is a DAO formed, then the holders will have the possibility to decide distinctive aspects of the project.
If we are not given any indication towards this matter, we will need to understand that we cannot decide on the future of the company. This is important to be clear about even when the project indicates that the acquisition of the token will allow its holder to be considered a Shareholder.
Differences between an ICO and an STO
1. Token Offer
It is common to find out the difference between security-utility as it refers to the tokens that are provided within ICO’s and STO’s. The main reason behind this is that ICO will offer a utility token for a certain platform.
On the other hand, the security token offering provides Security. This term refers to fungible forms of security that are open for discussion and has some type of monetary value in the financial market. The Security Token presented gives its holder the right to obtain dividends from the net profits that are in return obtained by the company within a period.
2. Legal Regulations
Legal bodies that have come into the market after the onset of ICO’s have raised a couple of options to evade the financial regulations for the investment market. A few of them have proposed that ICO’s are part of a future sale of a specific asset. Some others will see it as a selling object. . All the arguments seek the same thing and they do not wish to be seen as a value that can be regulated by strict legal policies.
STOs cannot use the same legal argument as ICOs since their concept itself seeks to offer security as it is regulated in the investment market. This implies that STOs must meet the same demands that a company that intends to go public would have to publish.
The legal situation of Security token offerings has led many of these projects to settle in jurisdictions that are flexible in terms of their financial constraints. Cyprus, Panama, and Estonia have presented less demanding regulations for these projects and have presented themselves as a framework to carry out these types of projects within their legal jurisdictions.
To learn more about the legal issue: Is Bitcoin legal?
What are IEOs?
The Initial Exchange Offering is known by many as the second generation ICOs. They have started to gain fame in the so-called “Crypto winter” of cryptocurrencies where ICOs had the lowest levels of collection in their history.
It is very simple to understand the ideology behind these is fairly simple as they are ICOs that limit the collection of capital with users and funds from a specific exchange. The first large exchange to implement IEOs was Binance with its Launchpad. After this, several other exchanges wanted to trace the model and today more than 20 interactions within the market offer the service for their users.
Differences between IEO’s and ICO’s
1. The subjection of the project to an authority or centralized entity
To effectively launch an ICO, you will not need the regulatory authority or governance from anyone, , you just have to create a web page, documentation like White Paper, and start with an aggressive marketing plan that generates a conviction in investors about the project. Additionally, the need to carry out an MVP (Minimum Viable Product or a Minimally Viable Product) could be added in order to provide greater confidence within investors.
An IEO does not work that way. In order for an IEO project to participate in an exchange, the exchange will be required to authorize and indicate the conditions that the project must meet in order to access its users. Additionally, on many occasions, tasks have to go through a series of requirements established by the exchange in order to be listed on the portal.
Along with authorization and review, completing an IEO within a deal will require a commission payment,. This is an element This commission is usually established as a percentage of the funds that the project manages to raise and it varies according to each of the exchanges that offer this service.
2. Investors are limited to one exchange
As noted earlier, an IEO is confined to only allowing users of exchange to participate. If the project has a potential investor who is not registered within the platform, they must go through the entire registration and identity verification that the exchange has to later deposit their cryptocurrencies within the portal and be able to invest in the project in question.
This feature has its advantages and disadvantages. From another perspective, it is favorable because it presents the projects with a base of users and funds that can become potential investors.
The unfavorable part of this is that the project is closed to investments that it may have in other ways. If they have potential investors who have their cryptocurrencies in another exchange or who do not rely on exchanges, they must concede with an account opening and identity verification process that in many cases does not end up being carried out by the potential investor, this will lead to forging a loss for the project in the future.
Apart from this, they also restrict the project not to acquiring any type of funds via FIAT money, which can also lead to a loss. This is mainly because not all investors have the needed cryptocurrencies to make a large investment within projects of this type.
3. There is greater “security” obtainable for investors
An Initial exchange offering can also be presented as a much safer option than an Initial coin offering. Each IEO assures its investors that they will actually receive all the tokens they acquire.
We also know that IEOs provide investors with the assurance that the asset obtained will have some type of commercialization as it will be listed within the exchange where the IEO was stored. This might not be considered, but it’s important to know that several ICO’s are left only because their developers do not specify the entry of a specific token within an exchange.