On the surface, both the Initial Coin Offerings and the Security Token Offerings follow a similar process in which an investor receives a crypto coin or token representing his investment. But unlike an ICO coin or token, a security token contains an underlying asset such as stocks, bonds, funds, or Real Estate Investment Trusts (REITs).
However, there are more differences between ICO and STO. Let’s look at them here.
How is STO different from ICO?
First and foremost, most ICOs are designed to raise funds in an unregulated environment.
Most ICOs position their offerings as utility tokens to circumvent regulations. Most founders and projects argue that they distribute user tokens to access their distributed applications (DApps) or native platforms. The main logic here is that the purpose of their coin is used, not speculation. Such reasoning allows ICO projects to avoid regulation and the need to register with the SEC or other strict regulatory bodies.
ICO vs. STO process
In contrast, STOs are introduced with a view of regulatory governance. They are registered with the required government agencies, meet all legal requirements, and are 100% legal.
It is, therefore, much more comfortable to introduce an ICO than an STO. STO requires a company to do a lot of compliance work in advance. While anyone can establish and participate in an ICO (unless local laws require otherwise), only fully compliant companies and accredited or at least known investors can sell and buy securities tokens.
ICO vs. STO — Advantages
Among the most frequently mentioned advantages of an ICO are.
- No barriers to entry for buyers and sellers.
- Positive network effects.
- The distribution of the tokens is easily automated.
- The teams can manage their money as they wish.
- A successful ICO often only requires a well-executed digital campaign.
- When a coin raises the price, and the team delivers, investors enjoy high profitability and benefits for early adopters.
- Some ICOs allow anonymous participation.
At the same time, an STO offers the following advantages:
- Investors acquire underlying assets that derive their value from something else.
- 100% regulated offerings that guarantee the security of investors.
- Projects aimed at STOs are generally more mature and trustworthy than those in the ICO sector.
- STOs are growing significantly while ICOs are shrinking space.
It is a continuing trend. - Securities tokens are expected to be traded through broker-dealers, which are also monitored by regulators.
- Security tokens are the next big step in the traditional financial world.
Less speculation and market manipulation.
ICO vs. STO — disadvantages
The most obvious disadvantages of an ICO are:
- High volatility and manipulation of the crypto market.
- Low liquidity.
- Uncertainty whether the product will be completed and delivered as described in the white paper.
- Fraud and pumping and dumping schemes are shared with ICOs.
- Regulations can cause problems for both projects and investors.
- Unregulated space with many risks.
- Meanwhile, the disadvantages of STOs:
- It takes time, effort, and money to get a green light from regulators.
- It can only be restricted to accredited investors.
- May require substantial amounts of money.
So far, the SEC has not approved a single Reg A+ STO and only allows institutional investors to participate.
ICO vs. STO features
Despite the differences, both ICO and STO are proven fundraising methods for Blockchain, and similar projects, and both have their pros and cons. You have to decide for yourself where you want to participate and how much risk you are willing to take. Contact us to discuss your blockchain project and see how we can support its development.
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