STO stands for Security Token Offering. Like ICO, STOs are issued to raise money for the business. However, these security tokens are backed by real assets, i.e. equity, debt, loans, funds, etc. STO is a blend of ICO (Initial Coin Offering) and IPO (Initial Public Offering). It was established as a secure form of raising funds after ICO suffered from frauds and scams. In early 2019 STOs increased by 135%.
What is an STO?
What is an IEO?
IEO stands for Initial Exchange Offering. It is an ICO done through the exchange. Instead of issuing the tokens directly to the investors, tokens are listed on exchanges for the investors to invest. Investors can instantly buy tokens from exchange using the funds stored in their exchange wallet. It is more secure than ICO, but there is no regulation. IEO came into action when ICO started facing a downfall. Binance was the first IEO cryptocurrency exchange.
Advantages and disadvantages of STO
Let’s read about the benefits and drawbacks of STO to see if it is better than IEO.
- Regulatory Compliance: It is one of the main benefits of STO. It is compliant with regulations. Unlike many other ICOs which faced cease and desist orders in the US, STO just needs to file for exemptions with the SEC to keep going.
- Safe: As STOs are regulated, there is no chance of fraud or scam from new investors. It is safe to raise funds and invest.
- Transparency: There is full transparency in STOs. The investors can see all the tokens that are issued. The investors can safely invest as there is transparency in STO.
- No entry barrier: There are very fewer entry barriers in STOs compared to IEOs. IEOs requires a very long procedure to issue shares. There are many parties involved. Lots of expenses are incurred in the IEO. Whereas STOs are easy to raise funds without any barriers.
- Flexibility: STOs provide flexibility in running the business. You can have complete control over the business and run it accordingly. The security tokens can also be traded after the initial selling is done. It increases liquidity.
- Global Investors: As the token standards are universal, they can be traded all around the global. It increases the number of global investors as there are no restrictions. It is not at all time-consuming, which makes it even better. The funds can be easily liquidated by investors.
- Fractional Ownership: Tokens allow the security asset to be divided into smaller units, thereby enabling fractional ownership. It also makes the token easier to transfer.
- Complex Compliance: Compliance can become a significant hindrance as the process becomes very complex. It has to follow the same compliance as an IPO which makes the process complex and increases legal risks.
- New Market: STO was launched in 2018, so it is fairly new. Also, the market in which STOs are issued is quite new. There can be long-term risks associated with it. New rules and regulation can be introduced, and a lot can happen in a new market.
- The platform needed to manage tokens: STO needs a digital platform to be run. Also, the tokens need to be managed through that platform. It needs a whole setup from where the funds can be raised, and tokens can be issued.
Advantages and disadvantages of IEO
Let’s study about the benefits and drawbacks of IEO to see if it is better than STO.
- Trust: IEOs can be trusted as they are listed through an exchange. Exchanges conduct their own search, whether the project is genuine or not. They also comply with Investors KYC. It is trustworthy as there are fewer chances of scam.
- Security: It is secure for both issuer as well as investors as exchanges run KYC and AML process to ensure safety and security.
- Quick Fund Raising: The funds can be raised very quickly. It can only take mere seconds for a project to be fully funded. As there is no regulation and documentation, everything can be done quickly.
- Marketing: Exchanges are responsible for marketing the tokens to the investors, so the issuer need not worry about marketing the tokens. When the issuer pays a listing fee, exchanges promise to list the token and market it as well.
- Safety: The issuer relies on exchanges to list and sell tokens, but sometimes exchanges can fool the issuer by using a pump and dump scheme. Also, it is more prone to safety issues as it is not regulated.
- Price Manipulation: Price can be easily manipulated by investors. To raise the value of tokens, investors can buy the majority of coins to manipulate the price. The investors are fooled to buy more coins.
- Restrictions: IEOs are restricted to only certain exchanges which makes it difficult for the investors to but tokens. The investors have to undergo KYC with the exchanges in order to buy the tokens.
- High Minimum Holdings: IEOs have higher minimum token holdings as compared to ICOs. Many investors are discouraged by this and tend not to buy the tokens.
Now we know what an STO and an IEO are. We also know their advantages and disadvantages. If you compare both STO and IEO, it is clear that one is better than others. While IEO is safe, it is still not regulated. There can be a higher chance of fraud. And if we see the market trend, at the end of 2019, the investors in IEO lost 98% of their funds due to fluctuations and fall of token value. IEOS also face many legal issues due to regulation. Whereas STOs are secure and safe as it is backed by assets. They are less likely to be manipulated. It is suitable for long-term and high-value investment. The odds are very less. STO Development Company provides STO solutions to the issuing company to make the process even more comfortable and profitable. So if you are looking for a safer and long-term project, you should go with STO instead of IEO, which is riskier. IEO’s often look tedious, however, there are many Initial Exchange Offering services providing companies which provide the complete IEO solutions to the people wanting to raise money.