The fund-raising process in crypto industry has started to witness some changes, especially after the collapse of the Initial Coin Offering (ICO) last year that coincided with the bearish cryptocurrency trend. Meanwhile, new projects are undergoing Initial Exchange Offering (IEO) and Security Token Offering (STO).
Let’s go deeply to know the difference between IEOs and STOs:
The definition of IEO
IEO stands for Initial Exchange Offering and is comparatively new in the market. Through IEOs, startups directly sell their tokens on cryptocurrency exchange platform, where the exchange plays the role of fund raising on behalf of the startup for fees.
Unlike ICOs where participants send their contributions to a smart contract, IEO contributors will have to open an account on the exchange that will host the IEO is conducted. Thereafter, contributors fund their exchange wallets with coins and use those funds to directly buy the tokens of the project.
The coins are exchanged directly for Bitcoin or Ethereum in the IEO platform. When the IEO starts, the BTC or ETH is directly exchanged for the tokens.
The advantages of IEO
-It can more trusted by contributors, depending on the reputation of the exchange. Since reputable exchanges should only select promising tokens, which would eventually result in better token listing.
-The platform is more trusted, stable and secure to participants and lower the chances of scams, especially as contributors do not transfer their contributions to a smart contract but directly to their accounts
-It can eliminate marketing costs for the project, as the exchange notify all its users with the date and details of the IEO.
-The new token will be available for trading to already pre-existing clients of the exchange, while the exchange will add new audience.
The disadvantages of IEO
-The cost of preparing the system to an IEO is costly, compared to an ICO.
-Liquidity is very low as participants are mainly the users of the exchange.
-The crypto exchange can create coins without a backing by a real project to generate money fast.
The meaning of STO
STO is an abbreviation for Security Token Offering, which is another crowdfunding method but it is more complex and difficult compared to an ICO.
STO issues an investment contract which is backed by the security token coins and is recorded on the blockchain.
The security token is an asset-backed and represents the ownership information which is recorded on the blockchain. It have various security forms such as stocks, bonds or dividend-paying assets.
The advantages of STO
-STOs are supposed to be real assets and thereby must conform to government regulations, so this should make STO the most trusted form of fundraising.
-It is characterized by high security due to the participation of only well recognized investors who have been allowed to join in STO, and since all transactions are KYC and AML accredited.
-It is good tool for long-term investors.
The disadvantages of STO
-The cost of raising funds is high through STOs compared to ICOs and IEOs, while the process is more complicated.
-Due to strict securities regulations in many countries, cross-border investors may not be allowed to participate in STOs.
-Low liquidity level due to strict government laws, as well as the difficulty to convert into money.
Of note, many countries have banned STOs, but in the United States all
tokens are dealt with as securities.