An initial coin offering (ICO), is a method used by new cryptocurrency companies to raise capital through crowdfunding. Some percentage of the ICO is sold to investors who are interested in supporting the project. These initial coin offered then exchanges for other established cryptocurrencies which is already in the market such as Bitcoin, Ethereum and fiat currencies. These backers purchase these new cryptocurrencies to make a profit at a later date which is just like the stock market to increase its value. Unlike the stock market where you have an ownership right on buying a share, you don’t have the ownership right of the crypto company on the purchase of their ICO.
The Security Token Offering (STO)
The Security Token offering is similar to the initial coin offering which is issued to the public through a crypto coin or a token which represents their investments and differs from ICO because the security token represents an investment contract of a particular investment asset such as bonds, funds, stocks etc.
Therefore, the security token shows the ownership information of the investment product which is recorded in a blockchain. When investing in the stock market, the ownership information is written and issued through a digital certificate. The STO’s goes through the same process, but the ownership information is recorded on a blockchain and released as a token. Furthermore, the STO cam also is seen as an approach between the crypto ICOs and the Initial Public Offering (IPO) because of its similar method of investment fundraising. Though it is the same approach, its token characteristics are different. It is more challenging to launch an STO as it intends to offer investment contracts which are under the securities law. So these platforms would have to do the work of making sure that they comply with relevant regulations. Funds would only be raised from investors who are accredited and have passed through specific requirements.
Initial Exchange Offering (IEO)
As its name suggests, the Initial Exchange Offering is conducted on a cryptocurrency exchange platform which is contrary to the Initial Coin Offerings, and it is regulated by a crypto exchange on behalf of its startup that seeks to use its newly issued tokens to raise funds.
As the sale of these tokens is conducted in the exchange’s platform, the issuers of the token would have to pay a listing fee coupled with a percentage of the sold token during the IEO. In return, the crypto startup token is sold on the exchange platform and the coins listed when the IEO is over. The cryptocurrency exchange will take some percentage of the tokens sold during the startup which serves as an incentive to help the token issuer in its marketing operations. The IEOs participants don’t have to send contributions to a smart contract like in an ICO instead; they create an account on the exchange platform where the IEO is conducted. The contributors can then fund their wallets, using the funds to buy the company’s fundraising tokens.
Why Investors are Moving From ICOs to IEO
Given the numerous amount of ICOs found around, there are various reasons why people are moving from them to the IEOs, and they include;
- The ICO has made it possible for these investors to tap the existing user base for the exchange for obtaining contributions in which they use for the IEO.
- The IEO has made it more difficult for scammers who know that they can only purchase a token from the contributors.
- Furthermore, the IEO functions as a vote of confidence from the exchange and sponsor which with its constant effort has to conduct this exchange on the developer’s project.
Conclusively, listing on the exchanges where the IEO is carried out can be considered a natural step.