Cryptocurrency as a way to raise capital: ICO, IEO, STO provide an alternative to the old-school IPO. Part one

Along with the development of blockchain technology, a new business model and ways to increase capital have appeared, and cryptocurrencies have opened up completely new financing opportunities for the world.

Revolution in the world of investing

Cryptocurrency has become a new opportunity for a growing number of startups to Finance their projects. ICO, IEO, and STO are widely used as alternatives to the already established and complex IPO process. If you are confused by all these abbreviations, don’t worry. In this article, we will explain what each of them means, and what are the pros and cons of this method of financing.

IPO (initial public offering of shares)

IPO (initial public offering of shares)
IPO (initial public offering of shares)

An IPO is the first sale of shares in a private company to shareholders. This is not news, as it is a generally accepted form of external financing. In an IPO, shares are sold through a centralized and regulated stock exchange, and strict government regulations must be followed.

In General, the prerequisites for a company to get an IPO permit include a good name and financial stability, which means that this method of financing is often not available for start-up companies. In addition, the firm’s financial performance must be reviewed by a professional audit firm.

All these processes make an IPO a very complex, long (up to 6 months) and expensive method of financing. Thus, even many companies that meet the above requirements do not enter the IPO. Moreover, even when shares are listed on the stock exchange, the company still needs to attract investors who must be accredited. Non-accredited investors should be guided by a document that determines where the funds from the sale of shares will go. Naturally, investors are interested in income or profit from the resale of shares.

ICO (initial coin offering)

ICO (initial coin offering)

ICO originated as the first blockchain-based crowdfunding model. Startups have recognized that this is a regulatory-free path to venture capital. Thus, in 2017, ICO has become a very popular method of financing. What can also be called the ICO hype lasted until at least 2018, and more than 5,000 ICOS have been held so far.

To launch an ICO, you just need a website with the address of the wallet to which the cryptocurrency will be sent. Often, the project conducted an ICO with only a “technical document” describing their idea, without a minimum viable product (MVP). Sometimes even technical documents were missing or written carelessly.

Everything is developed in complete anonymity, and investors are not protected, so there was nothing unusual in fraud. It should be noted that only a small percentage of ICOS in 2017-2018 were successful. Many of them failed to provide a working product, some committed exit fraud and escaped with all the funds raised, and others, such as Telegram TON, were stopped by regulatory authorities, namely the US securities and exchange Commission (SEC).

Today, ICOS are considered very risky, as investors will only benefit if the development and implementation of the project idea is successful. In addition, due to strict regulatory requirements, it is now much more difficult to conduct an ICO than it was in 2017. The concept of IEO and STO appeared as a more regulated and investor-protecting alternative to the once very popular ICO.

End of the first part.