The crypto industry has provided investors and entrepreneurs with an excellent alternative to the outdated traditional investment model, allowing them to radically change all the rules of the game.
IEO (initial exchange offer)
In an ICO, investors transfer money to the project team in exchange for a certain amount of cryptocurrency on this blockchain. There were many reasons why this was problematic, mostly due to fraud and failed projects.
IEO works differently IEO, as the name suggests, have a cryptocurrency exchange platform as an intermediary. You don’t transfer money to developers, but to a cryptocurrency exchange that has teamed up with them. In exchange, instead of the project team directly awarding you tokens, you now receive them from the cryptocurrency exchange platform.
There are many advantages for investors. First, when a crypto exchange site is combined with a crypto project, the reputation of the exchange is at stake. If the development team does not achieve the stated goals, there is a risk. If the project fails or, even worse, it turns out to be a Scam, the exchange will take the brunt.
This means that the cryptocurrency exchange site conducts due diligence before accepting projects into its EIO offerings. This includes checking the technical description of the project, its participants, and ensuring that the goals are achievable and realistic.
Exchange sites can even withdraw from the IEO at any time before it is held, if they find something questionable. This has actually happened before. And it will happen again, at least with reputable exchanges.
Thus, the investor significantly reduces the risk compared to the ICO. This doesn’t mean that the project can’t be a Scam, but it’s much less likely that it will be.
After the IEO, the purchased tokens will be displayed in the investor’s online wallet, and often trading can start immediately, which is another important advantage for both the project and investors. The cryptocurrency exchange also applies certain security and regulatory measures, such as the KYC process and AML measures.
STO (security token offer)
Through STO, investors can purchase security tokens, which gives them the right to receive payments similar to dividends, or the right to vote for the future of the issuing company. As securities, securities tokens, with some exceptions, are required to comply with the rules and laws that apply to the issuance and trading of securities in the country where they are issued.
It can be said that STO is the most similar to IPO of all methods of raising funds for cryptocurrency, except that it occurs on the blockchain. In addition, similar strict rules apply, and the process of obtaining permission to conduct an STO can sometimes take up to 6 months. Strict rules regulate the source of money, increase corporate responsibility, and reduce the likelihood of fraud.
However, there is a positive side to strict regulation. As the blockchain industry becomes increasingly attractive to institutional investors, a well-regulated funding method can lead to a massive influx of funds if the project attracts the interest of an institutional investor. The proposed token must be registered and meet the requirements of local legislation.
According to the law, companies must register with the local regulatory authority in order to be included in the list of companies that issue their shares for free sale. Thus, preparing for the STO is very difficult and expensive, but managing after the offer is cheap. However, STO is still cheaper than IPO, since most of the administrative work is done online.
While the rules can be a big drawback for entrepreneurs, they also provide a certain level of security for both parties. We can conclude that IPOs are and probably will remain an established procedure for raising funds for already well-known companies, while the popularity of ICOS is declining. This is why most blockchain startups choose a slightly less regulated IEO or a more complex STO.
However, if the issued token has no other utility other than representing the company’s ownership interest and giving its owner the right to vote on offers, this type of asset is likely to be considered a security and therefore subject to stricter regulation.