ICO, STO, IEO – There are now so many acronyms around the process of raising capital it’s becoming a bit confusing for the basic retail investor who isn’t spending 40+ hours a week in the markets.
The good news is that while all these acronyms might seem intimidating, they’re actually pretty easier to understand. This article will explain what each acronym means, when each type of funding model is used, what the pros and cons of each are, and how to get involved.
We’ll also go over some of the most popular token sales in each category, and discuss how the changing landscape might impact projects and investors.
Let’s get started!
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Initial Coin Offering (ICO)
Blockchain projects began using Initial Coin Offerings (ICOs) in July 2013, when Mastercoin held what is thought to be the very first ICO. In an ICO the blockchain company sells tokens to investors, typically in exchange for BTC or ETH, in an effort to raise funds for the ongoing development of the project.
Some of the early ICOs. Image via Slideshare
Investors buy the tokens with the expectation that they will increase in value and can be sold at a profit later.
The pros and cons of ICOs:
- Easy to participate. If you have BTC or ETH in your wallet you can typically get involved.
- ICO campaigns often include bounty programs and airdrops that allow users to get some tokens for free.
- The lack of regulation has seen many fake or scam projects raise funds and then disappear with investor money.
- Once you buy the token you still need it to be listed on an exchange to trade it.
- It’s very high risk. In addition to the prevalence of scams, there’s also the risk that the price of the token will drop following the ICO.
Security Token Offering (STO)
A Security Token Offering (STOs) is a new method for raising funds that came about in reaction to the beginning crackdown by the Security and Exchange Commission on fraudulent ICOs.
With the STO an investor must be considered accredited to purchase ($1 million+ net worth and $200k annual income for 2+ years). The security tokens themselves work similarly to stocks and give their owners rights to equity and dividends from the issuing company.
The STO Lifecycle and an ICO compared to an STO. Images via Hackernoon & BitDeal
The pros and cons of STOs:
- Scams and fraud have been eliminated since the STO works within the regulatory framework of the SEC in the U.S. and FINMA in Europe.
- Because tokens are issued as securities they are backed by the assets of the issuing company and have real value.
- Investors must be considered accredited by the SEC to participate in STOs, which makes the barrier to entry quite high.
- Similarly to ICOs you have to wait for the token to get listed on an exchange to be able to trade it.
Initial Exchange Offering
The latest fundraising scheme being used is called Initial Exchange Offerings (IEOs) and they are an alternative to the ICO, with tokens being sold directly from an exchange platform.
IEOs are similar to the ICO, but the exchange takes full responsibility for the fundraising process, including vetting the blockchain project to determine if it is legitimate and likely to be successful.
Binance taking the lead with Initial Exchange Offerings. Image via Binance Launchpad
The Launchpad on the Binance Exchange is the largest and most well-known platform for IEOs so far, but there’s also Huobi Prime, OkEx Jumpstart, Bittrex International, KuCoin Spotlight and over a dozen others.
The pros and cons of IEOs:
- Very low barrier to entry. If you have a verified account and cryptocurrency on the IEO platform you can participate.
- The exchange does the vetting of the project to ensure it is trustworthy.
- Tokens are listed immediately on the exchange and available to trade.
- There’s no guarantee the token price will rise following the IEO.
- They remain utility tokens and have no assets or real value backing them.
Why So Many Options?
ICOs were created as an alternative to the IPO, which gave blockchain companies a way to raise capital for their projects without giving up any of the equity in the company. The fact that ICOs were unregulated made it easy for projects to run fundraising campaigns.
Unfortunately, the lack of regulation also invited scammers, fraudsters and bad actors to create projects simply as a cash grab…
As a result, the STO was introduced and it solves one of the main issues that ICOs have, which is the lack of any available compensation for investors if the project somehow dies or disappears.
STO Registration Requirements. Image via Medium
Because the STO tokens are linked to real equity and regulated under SEC and FINMA requirements all the projects using this fundraising method are legitimate and there are no concerns about the project’s disappearing with investor funds.
The IEO is something of a hybrid. While there is no equity behind the tokens launched via and IEO, there is due diligence performed by the listing exchange platform. The exchange takes on the burden of investigating the financial condition, risks, project development, market position, product viability, and other factors.
When an exchange allows an IEO there’s a reputational risk to the exchange if the project turns out to be bad. Because of this risk, the trust level from buyers is increased.
How Users Can Participate
There are still a number of projects launching using the ICO method, and joining is quite easy. All you need is cryptocurrency (usually BTC or ETH) with which you buy the ICO token.
In the case of an IEO, you also need an account at the exchange holding the token sale. In many cases, the exchange has its own proprietary token that must be used to participate in the IEO (Binance Coin for Binance for eg.)
Recent IEOs on the Binance Launchpad. Image via Binance Launchpad
When it comes to STOs there are increased regulations to adhere to and more requirements for investors. Buyers are required to be accredited investors under regulations, and that increases the barrier to entry. Under U.S. laws an accredited investor meets one of the four following requirements:
- An organization with over $5 million in assets, such as a hedge fund or other fund;
- An individual with net assets exceeding $1 million, not including the investor’s primary residence;
- Annual income in excess of $200,000 for an individual or $300,000 for a married couple. This income must be maintained for the past two years and expected to continue in the year in which the security tokens are purchased;
- A company whose members are all accredited.
ICOs Breaking the Mould
Late 2017 was the time of the ICO when nearly any project was able to raise millions of dollars within minutes or less. The most popular ICOs at the time were Ethereum, NEO and EOS. In the case of EOS the amount raised was $4 billion.
Another successful ICO was held by messaging app Telegram in support of their planned Telegram Open Network (TON) in 2018. This was a private ICO and it raised $1.7 billion in two sales rounds.
Telegram TON ICO & Other ICOs. Image via TechCrunch
Those who bought certain ICO tokens were well rewarded for their risk-taking. For example, Ethereum sold its tokens for $0.311 and subsequently saw its price jump as high as $1,432.
Today it remains above $300. The NXT token sold for just $0.0000168 in its token sale and reached as high as $2.16 per token at one point. It currently trades for just over $0.03 per token.
Interest in ICOs declined in 2018, partially due to the bear market in cryptocurrencies, but also because of the scams prevalent in the ICO space. The ICO model was based on trust and it became too difficult to trust new ICO projects.
STOs Continue to Grow
The first alternative to ICOs became STOs with their increased regulations and safety for investors. Unfortunately, they haven’t been very popular because they are both expensive and difficult for the blockchain project to implement, and out of the reach of most retail investors.
Still, there have been successful STOs, but nowhere near the scale of ICO fundraising. Blockchain Capital was one of the first, raising $10 million in just a few hours. Spice VC was able to raise $15 million during its fundraising campaign. And the NEXO platform generated $52.5 million to help develop its cryptocurrency loan platform.
STO Funding in First half of 2019. Image via Inwara H1 Report
As you can see, these STOs didn’t bring in billions of dollars, and they also didn’t generate the massive returns seen from some ICOs. In fact, none gained more than 200% even at their all-time highs, and most are flat to modestly higher currently.
And even though these STO tokens are different from most cryptocurrencies, being backed by actual equity, they still suffered along with the broader market during the 2018 bear market. STOs are trustworthy, but the high barrier to entry makes it unlikely they’ll ever become wildly popular like the ICO was in 2017.
Welcome to The IEO Show
IEOs don’t have an STO’s high barrier to entry, and they have a higher trust rating from investors since the projects offered have already been vetted by the listing exchange, who has their own reputation to consider when listing a project.
The IEO process is straightforward. A project that wants to list submits an application to the exchange. The exchange then does due diligence on the project, evaluating the product, their tokenomic model, the management and development team, the community behind the project and any other relevant factors.
They then respond to the application and if accepted will inform the project the price the token can be listed at and the success fee charged by the exchange.
Initial Exchange offering in H1 2019. Image via Inwara H1 Report
These success fees can top $1 million but have been acceptable to blockchain projects because so far the success rate for IEOs has been an unbelievable 100%.
Tokens listed in IEOs in 2019 have been able to raise millions of dollars in mere seconds…
One of the first was the BitTorrent listing on the new Binance Launchpad platform. The investor hype for this one was so great that the Binance Launchpad platform crashed under the weight of so many users attempting to access the site and purchase tokens. Within a couple of minutes, the IEO was complete, with BitTorrent (BTT) raising $15 million.
There are over a dozen other exchanges with their own IEO platforms and as the crypto ecosystem recovers in 2019 the number of IEOs is expected to increase.
As the fundraising space for blockchain projects continues to evolve it’s almost certain we’ll get some new acronym for a new type of campaign. My guess is that evolving regulations will eventually put fundraising primarily under an STO model, at least in most countries. This new model will allow for all investors however, just as traditional equities do.
In the meantime, the IEO appears to be the best choice, not only for investors but also for the blockchain projects themselves. They are easy to put together, since the exchange does the heavy lifting, and as of mid-2019 are extremely popular and successful.
While the fees for the listing project can be quite high, the 100% success rate helps to offset that to some degree.
Until regulations are drafted covering the issuance of new tokens the exchanges remain in a strong position as they bring trust, liquidity and growing experience to the token launch process.
Featured Image via Shutterstock