For crypto newcomers, ICO vs STO is now the most popular comparison on Google. And every year, the number of Google searches for “What’s an ICO” or “What is STO” is growing. That’s why we decided to create a quick comprehensive comparison of STOs and ICOs. We are going to explain the difference and highlight the benefits and risks of ICOs and STOs, we will also cover which type gives investors more prospects and opportunities to succeed today.
ICO is a way to raise funds based on the crowdfunding model, this method is not regulated by laws or banks. Even though ICOs are still relatively new, this fundraising method has become the main way for startups to get investment.
In 2017, ICOs were a more appealing investment tool than real estate for a large number of investors and even some bonds funds. The first ICOs were held by Omni Layer (formally Mastercoin) in 2013 and Ethereum in 2014, both ended successfully, and became a good example to follow. 2017 and 2018 were the “golden time” for blockchain startups that held ICOs.
STOs, on the other hand, did not become widely used until October 2018. That year, Indiegogo hosted a project by St. Regis Aspen Resort — issuing its first security token. This new form of equity became extremely successful — in fact, it has raised over $18 million. Making it the first global success case of this new form of investment. STOs have since started to gain traction.
While many businesses still struggle to understand how they can use ICOs and STOs, token offerings are very popular today among blockchain startups.
First understanding the difference between ICOs and STOs will help to better appreciate both offerings, including their benefits and risks, and which type gives investors and companies more opportunities.
What is an initial coin offering?
An ICO, or Initial Coin Offering, is the issue by a project of coupons, or tokens, intended to pay for the site’s services in the future – in the form of cryptocurrency. This is one of the most popular fundraising methods for blockchain startups.
During an ICO, unlike an IPO, the buyers of the cryptocurrency do not receive a stake in the company and cannot influence internal management decisions in any way. In fact, the ICO is another implementation of the crowdfunding model, when participants finance the development of a company now in order to get some benefits from it in the future.
By issuing its own money and exchanging it into one of the common cryptocurrencies (such as Bitcoin or Ethereum), or even real currencies (dollars, euros), the project can provide itself with the funding needed to launch or develop. In addition, by issuing currency for a project, it is possible to accelerate its development and automatically solve the problem of future monetization.
Blockchain technology is always used together with an ICO. Blockchain is, no surprise to anyone today, the technology of the future. Depending on the direction of the project, the use of blockchain can provide certain savings. One way or another, all ICO projects are blockchain-related.
What is a security token offering?
If you have ever launched or invested in ICOs (initial coin offering), you’re roughly familiar with the process — exchanging crypto for tokens and buying your share out once the value of a token increases. ICOs have a low barrier of entry, which is why this form of investment is generating so much hype.
However, as time is showing, ICOs aren’t always secure either. There have been a ton of pump-and-dump schemes — basically, after having paid for tokens, investors couldn’t cash out on them.
To protect the rights of their investments, companies started looking for new forms of crowdfunding. Instead of utility tokens, STOs offer more use cases — they can be cashed out as equity points, property trust funds, bonds, and stock. Security tokens are more universal than utility tokens. It’s worth noting, however, that unlike other forms of tokenization, STOs have a fairly high entrance barrier, and only accredited investors can get these tokens. At the same time, unlike an ICO, a security token represents an investment contract into an underlying investment asset, such as funds and real estate investment trusts (REIT).
During an STO, blockchain plays a great role because often this determines whether investors decide to invest or not. Nevertheless, STO coins are highly valuable for many investors as well as for some bond funds. STOs are one of the most favored fundraising methods used by modern blockchain startups. That is why there are a lot of ICO vs STO comparisons.
Differences between ICO and STO
While the term STO (security token offering) has only been around for 2-3 years, the idea of regulated tokens has been in the making for a while. Without having to change the structure and the process of the deal, companies wanted to ensure that transactions are regulated and secure.
After a while, however, it became apparent that STOs are different enough from initial coin offerings to get their own name instead of being known as ‘ICO 2.0’. What are the differences that make investors and businesses approach the two forms of tokenization as separate entities?
It can be looked at in the following way:
STO = ICO + Legal regulation
Keeping in mind all the security concerns of ICOs, the market entrance of security tokens was highly anticipated. A strong desire of governments to finally regulate the token market in order to protect investors forced the Securities and Exchange Commission (SEC) to come up with a more reliable investment mechanism than ICO.
Case study: SKYCOIN - Utility for cryptocurrency project
While the difference between ICOs and STOs seems to be relatively formal, there are several options to consider if you’re wondering which one to choose. This ICO vs STO differences comparison will be very useful both for newcomers and experienced investors.
- STOs provide startups with additional security — all tokens are registered and inspected by the SEC. That reduces the risk of an unreliable investment. An STO is backed by real assets, such as real estate investment trusts (REIT), and is recorded on a blockchain.
- STOs are only accessible to accredited investors. Companies, in turn, can make sure the investor is reliable and assess their previous activities before letting an outsider jump into the company and sharing equity or trusts with them.
- STOs are regulated while ICOs aren’t. ICOs are known to be the Wild West of investments — there are no guarantees for investors and a huge risk of becoming a pump-and-dump victim. With STOs, every transaction is overseen by the SEC as well as the parties involved. This regulation can be both a blessing and a curse — while it provides both companies and investors with security, it slows transactions down as well.
- Investment transparency due to thorough regulation. Comparing ICOs vs STOs, it’s clear that the latter provides businesses with more transparency. All business plans and strategies will be revised so that investors can have a better idea of the company they’ll be investing in.
- Smaller investor pool — that’s one of the STO’s fewer downsides for companies. The choice of STO investors is more complicated than that for ICOs. On the other hand, available funders will be more reliable and experienced, all of their actions will be meticulously monitored.
- High entrance barrier for STO investors. Most token investors enjoy a high level of liquidity and low-level control when it comes to tokens. Unlike standard ICOs, security token ICOs don’t offer such an open market. While making contact with startups is certainly easier, STOs are not about to cut middlemen and supervision entirely. All the exchanges are controlled by FINRA and SEC-registered. Moreover, STO exchanges will take place on separate platforms – Alternative Trading Systems (ATSs).
It’s hard to determine which form of tokenization is better overall. Small startups and investors are more likely to go with an ICO due to its open markets and fewer constraints. However, if your business generates over $10 million per year and aims to provide stakeholders with liquidity and issue transferable assets, STO is the way to go.
ICO vs STO: Benefits of ICO and STO
Benefits of ICOs
- No freezing of funds. This factor is rather attractive to investors. Unlike venture capital investment, crowdfunding, or IPOs, investors’ funds in ICOs are not frozen. In general, investing in an ICO is much easier and cheaper. Immediately after the purchase of tokens and their appearance on cryptocurrency exchanges, people assess the value of the asset. From the first day of the project’s life, the token has liquidity.
- Low entry threshold for investors. In the case of an ICO, an investor can buy tokens for just $100, or even less. Such an amount will also work for crowdfunding, but it will not work with IPOs or venture capital investment. What does this do for the ICO project team? The range of potential investors expands. Now an investor may not be only an investment fund or a business angel but also an ordinary factory worker.
- No interference from the investor. In the case of initial public offerings or venture capital investment, large investors can influence the founder and impose their opinion. In the case of an ICO, there are no such risks. The project is 100% managed by the founder’s team.
- Early access to tokens. The earlier an investor gets access to a token, the more growth potential it will have. And in the case of ICOs, the purchase of tokens occurs already at pre-sale.
- Lack of regulation by the state. In fact, anybody can already argue about this point. In some states, the regulation of the ICO and cryptocurrency market has appeared. But so far it is still possible to conduct an ICO without unnecessary red tape with documents, certificates, etc.
- Exchangeability of tokens for others. ICO investors always have an option to exchange ICO project tokens for more liquid tokens of the same, such as ETH or BTC. And if you consider the total number of existing cryptocurrencies, the choice becomes even wider.
- Community formation. When a new ICO project appears on the market and its idea is really worthwhile, a whole community forms around the project. These are the people who are interested in technology and want to take part in its development. Yes, not everyone will invest their hard-earned money, but a large crypto community develops the industry as a whole and strengthens the cryptocurrency and blockchain market.
Benefits of STOs
- A chance to combine the flexibility of crypto with the reliability of traditional finance. ICOs were favored by companies and investors alike mainly because they were simple to issue and invest in. With an STO, it’ll stay this way, adding only a need for obligatory registration for issuers. With STOs in play, all the tokens are registered by the SEC, meaning they are legal and fraud-protected.
- Tokenization is cheaper and more flexible than an IPO (initial public offering). Where an IPO provides companies with more certainty, an STO is superior in terms of flexibility. The latter is not tied to one country, has a lower barrier of entry, and offers more transparent access to investors. Moreover, due to fewer constraints and compliance norms, STOs are way cheaper to issue than stock market offerings.
- STOs enable 24/7 trading that wouldn’t be possible in traditional markets. As traditional trade markets rely on human maintenance, they are normally open only during work hours (EST time zone). Blockchain and crypto markets, on the contrary, are open 24/7 — which results in better liquidity and increases the overall trading volume.
- Empowering fractional ownership. Most forms of investment (such as real estate) are non-liquid — they cannot be sold or exchanged easily. With STOs, an investor can purchase a fraction of an investment — this way, he’ll increase his portfolio without having to pay large amounts of money.
- Lower risk of scams and pump-and-dump. According to CoinDesk, there’s been a huge financial influx into ICO investments. However, due to hostility and the lack of regulations of the ICO markets, a fair share of these projects ended up being abandoned and investors never got a chance to cash tokens out. An STO gives venture capital firms the option to capitalize on the simplicity and flexibility of tokenization because it would be a legal and secure investment.
- Regulated international market. STO development allows investors and companies to create a global regulated investment market. With platforms like KYC Legal and ICO Pass, everyone can register a security token that will be 100%-legal. There are no nationality requirements to invest or issue tokens, which allows companies and investors to access global markets with no constraints.
Risks to overcome while adopting an ICO or STO
- Legal issues. Despite the frenzied popularity of ICOs and the effectiveness of this method of raising capital, it is not always easy to take advantage of all the legal nuances. For example, the organizers of many ICOs still prohibit U.S. citizens from participating in them. This is due to the clarifications published in July 2017 by the U.S. Securities and Exchange Commission (SEC). So, if a company decides, at its own risk, to allow U.S. citizens to buy tokens, it may be in for some unpleasant surprises.
For example, in December 2017, the SEC blocked the ICO of restaurant startup Munchee. The company planned to raise $15 million using its own MUN tokens. The regulatory bodies emphasized in its filing that the company wasn’t just planning to raise funds for its own growth and business, but promised in its White Paper to investors an increase in token value – the same thing that buyers of common stock hope for. Munchee ended up having to shut down the ICO and return all the money it raised. To avoid getting into the same unpleasant situation, the company needs to do some serious legal work. And its volume will be even higher if you are going to attract American investors.
- Security. Legal challenges are not the only challenges ICO organizers face. One of the biggest threats is the actions of hackers. According to a study published by Ernst & Young, more than 10% of all money raised in this way was stolen by cybercriminals. The analysts studied 372 ICOs from 2015 to 2017. Monthly losses from the actions of hackers in ICOs are $1.5 million. In addition to money, hackers often gain access to the personal information of investors: from their addresses and phone numbers to payment information.
Hackers can attack through vulnerabilities in a smart contract. If a startup doesn’t find them itself, hackers can. The very nature of smart contracts requires a company to close all vulnerabilities before launching a token sale, or else it will be too late. Hackers also can attack through vulnerabilities in applications – in addition to smart contracts, any ICO uses a lot of other programs and applications in one way or another. For example, an insufficiently secured website through which investors buy tokens can lead to terrible consequences, even if the code of the smart contract itself has been seriously audited. No system is completely invulnerable, but at least try to reduce the likelihood of a successful ICO attack. First of all, the startup should invite experts to conduct an information security audit and set up continuous monitoring of the infrastructure. Only in this way, will it be possible to reduce the number of errors in the creation of software and hardware settings, and to identify anomalies that may indicate the activity of hackers.
- Protecting investors from the actions of speculators. In the cryptocurrency market and ICOs, cases of artificial price markups (pump and dump) are widespread. In some cases, traders may collude to buy a particular cryptocurrency and then launch a coordinated (e.g., via Telegram chats) advertising campaign designed to promote their chosen coin. Some early investors in ICOs do the same – this allows them to raise the price of a token and then “dump” it on the secondary market.
The centralized sale of large volumes of tokens collapses their price and negatively affects the project’s prospects. Such actions by unscrupulous traders are another risk when organizing token sales. There are various ways to combat such schemes. One of them is to limit the issuance of paid tokens until the end of the ICO. A company can confirm a transaction with an investor with a special code in a personal account or by other means, but not to accrue tokens until the end of the offering. In this way, the probability of an instant secondary market with its manipulation is reduced to zero. In addition, it makes sense to break token issuance into several stages and create incentives to keep them within the project, rather than quickly sell them.
- Legal compliance. As companies are inspected by the SEC, they have to make sure all the finances are on point before adopting STOs. For startup founders with no dedicated departments, it’s known to be quite challenging.
- Backup withholding. While adopting security tokens, keep in mind that they are subject to backup withholding tax (at the very least in the US).
- Security risks. Unlike traditional tokens that only offer investors the monetary value, STOs let investors behind the curtains of the company. That provides possible security risks as a token issuer never knows if an investor is going to misuse the company’s data.
- Profitability risks for investors. Seeing that STO is still relatively new, there are fewer cases of successful Investments. That way, investors could be more confident in the profitability of their contribution through the traditional financial system.
List of major blockchain platforms to develop ICO & STO
Blockchain platforms to develop ICO
At the moment, Ethereum is the most popular platform for supporting ICOs. Almost in the same way that the HTTP standard shaped the way we look at the internet, Ethereum standardized the ICO with ERC20 tokens. ERC20 is a technical specification that anyone who wants to launch their own token can follow.
The main advantage of a standardized token is compatibility. Tokens created on the Ethereum blockchain can interoperate with each other. ERC20 tokens are less prone to bad code problems and security holes, have more liquidity, and launching an ICO is easier and faster than with other tools. This makes Ethereum a great choice for just about anyone looking to launch an ICO.
NEO is often referred to as the “Eastern Ethereum”. NEO has several advantages that make it a good choice for anyone looking to launch a fundraiser. First, the platform’s design suggests scalability. Unlike Ethereum, NEO is capable of up to 10,000 transactions per second. In addition, the platform uses the more familiar programming languages of Java and C#. This means that it will be much easier for in-house specialists to launch a project on this platform.
NEO also boasts other technical improvements over its competitors. These include the ability to integrate digital identifiers and digital assets into its smart contracts and the use of dBFT’s unique consensus mechanism.
The Waves platform was created with one goal in mind: to speed up the launch of ICOs. Since its opening, it has changed its slogan due to the expansion of the services it offers, but the original version is still relevant today. Waves was the first platform specifically designed for ICOs. It offers many tools for simple token creation without any in-depth technical knowledge. Waves knew about the scalability issues with Ethereum and prevented them in their project by offering users support for large transaction volumes. Waves also have their own decentralized exchange (DEX) built-in. Any token created can be used for trading almost instantly.
Thanks to this, anyone who was not able to participate in the ICO, but heard about the project, will be able to exchange their fiat or cryptocurrency for certain tokens. This is a huge advantage for Waves compared to other platforms, whose tokens cannot be traded for months.
Waves is a great choice for those who want to launch an ICO, but the platform is especially suitable for teams who do not have the resources to use the Ethereum platform. Waves will also suit those who want to be on the exchange immediately after issuing a token.
Blockchain platforms to develop STO
Polymath is positioned as the second Ethereum-based investor aimed at security token issuance. The tool has a proprietary ST-20 token standard, and there’s a system of smart contracts as well.
Similar to Ethereum, Polymath has a native token used for all Blockchain-based operations within the platform — POLY. Moreover, the platform provides companies with legal and security advice regarding tokenization.
Next on the list is Securitize — a platform that provides end-to-end support for companies seeking asset tokenization. Securitize analyzes the profiles of investors, from login to the source of capital in order to make sure the company has reliable shareholders.
Harbor is another platform for token issuance that, apart from launching an STO itself, the platform helps companies to make sure these tokens are compliant with security protocols.
To tokenize assets, Harbor uses a proprietary R-token which enables transfers once they are approved by the Regulator Service.
Case study: CRYPTOCURRENCY DEVELOPMENT FOR SOUTH-EAST ASIAN CLIENT
How to start a successful ICO & STO
Steps for a successful ICO launch
- Form a team of experienced experts. If possible, find people who have already worked with blockchain and ICOs. This will reduce the time you need for the launch and will save your nerves as well. These people can advise you on your actions or even help to complete the whole project.
- Think carefully about the content of your website and the whitepaper. The website for your ICO is your business card, it should represent what you do in all ways. But it should represent the project and attract attention. The whitepaper for an ICO can help you describe your aim in more words. But, at the same time, it should be understandable to the masses.
- Launch a pre-ICO, a presale of tokens you are about to issue before the actual ICO takes place. The tokens at a presale are usually sold cheaper than at the ICO itself and in lesser amounts. However, be careful, people tend to ditch the tokens bought at the pre-ICO at exchange markets as soon as possible.
- Give some bounties to your ICO public page’s active users. Small rewards to the most active users will help you keep them interested and have yourself promoted. You can offer them some tokens, or the services you are going to provide for free.
- Purchase an ICO tracker service. The companies developing trackers collect information about ICOs so that investors don’t have to dig for it themselves.
- Be active in social networks and forums. The world nowadays lives on the net. And since your ICO is directly related to that, that’s where you will find your audience.
- Analyze the competitive solutions. You need to make sure that your idea has an advantage over your competitors. So, do a bit of research, see what they are doing and, mainly, how.
Steps to starting a successful STO
Step 1. Gathering a team
In order to launch an STO, you’ll most likely need a founding team. You can either hire a small in-house department that would expand as soon as the token development becomes a steady commitment, or you can contact teams like Unicsoft, with an established workflow and years of experience — a risk-free way to go about this.
In order to get started with STO development, you’ll need a business developer to work on a business plan for tokenization as well as someone responsible for legal and financial documentation.
Step 2. Prepare marketing materials for an STO
Before bringing the idea to life, take some time to test it. A few things you need to verify include:
- Are investors interested in sharing assets in your business?
- Do they have an understanding of STOs?
- Are people willing to purchase an asset token in your company?
After a business owner sees some interest regarding the upcoming project, he has to keep feeding it. This includes creating eBooks, white papers, and blog posts explaining why you have decided on STO development and how investors can profit from buying in.
Step 3. Register a token symbol
When registering a token symbol, there’s no need to choose a unique one since it’s not monitored nor regulated.
You can protect a symbol according to federal trademark law; however, be prepared for the fact that someone could clone your contract and symbol and deploy it.
Step 4. Choosing providers
When choosing a KYC token provider, make sure to take the following details into account:
- Legal experience. A provider should have a strong grasp of the international jurisdictions.
- Data security. Make sure a token provider understands the importance of data security and uses the means compliant either with GDPR, the Asian local directive, or US Federal Laws targeting privacy protection.
- Fast integration. Make sure the provider is capable of creating a front-end and back-end integration for the solution.
Step 5. Security token offerings development
After an STO founding team has chosen a reliable provider, it’s time to settle on a platform for the token launch. We’ve outlined the most popular options below– the list, however, is not complete.
Choosing a reliable development platform will be easier if you have a set of criteria to narrow down the list of options and choose the best fit among them.
Step 6. Setting up the offering details
This means defining the nature of your token — essentially, what you will be offering investors. Here are some ideas to consider:
- Right token. This provides an investor with a set of rights within the company — access to the market, the right of product usage, or the option to contribute to the governing action.
- Function. This token allows users to get access to a particular product feature or a service (for instance, BI software can offer advanced analytics tools to those who’ve invested in security tokens).
- Currency. The token is used as a currency that allows performing operations within the ecosystem.
Step 7. Marketing campaign
Now that the token is created and the offering itself is well-defined, a business owner needs to start a marketing campaign to spread word of the launch. This includes networking, publishing guest posts on industry-related websites, conducting Google AdWords and social media campaigns, etc.
Case study: LENDING PLATFORM FOR UK CLIENT
STOs are a product, born out of an innovative approach to tokenization. The reduced risk of investment, the ledger transparency, improved protection, and exchange flexibility makes the new form of tokens highly sought after. It’s worth noting that, currently STOs are only issued by a small fraction of the market. However, following the disappointment and downfall of ICOs, an investor’s need for security and protection will grow — and with it, so will the STO market.
Although, the STO offering can be more difficult to conduct than the ICO offering. With its simplicity, the ICO development attracts a lot of modern startups. And compared to STO, to issue its own money using the ICO model takes less effort.
Nevertheless, both STO and ICO have some nuances that should be considered before using either offering. We hope our ICO versus STO comparison has helped you to understand both offerings better.
Being among the first to start issuing security tokens or coins allows businesses to be the pioneers in highly lucrative markets. There are STO and ICO issuance platforms to help you out and the fees for the token launch are still relatively low. The market is still in its founding stage and businesses can benefit from getting on board early.
Looking for a trusted vendor to advise on building a blockchain-based product? Unicsoft blockchain consultants help with the challenges in blockchain development while delivering a thorough analysis of current business processes, specifying needs for blockchain solutions, and estimating value from the blockchain applications in your business. Take a look at our work or leave us a message to discuss your project.