In an initial coin offering (ICO), the investor acquires a crypto coin/token which forms the basis of their investment. Similarly, a security token offering (STO) offers a crypto coin/token as the basis of a buyer’s investment. Taking a close look, the perspective for both offerings is similar; yet a closer look reveals several if not few differences between ICOs and STO.
Before outlining the underlying differences between both offerings; I would like to state that an STO comes attached alongside the token, investment assets such as real investments trusts (REIT), stocks, bonds and funds. That maybe offers a better picture of how different an STO is from an ICO. Meanwhile, there is yet a bigger difference, in terms of the benefits and limitations of each offering.
Governance and regulatory structures
ICOs have a goal in mind to operate under an unregulated environment. The goal is to raise funds and positions the offering as utility tokens without speculation but usage. Therefore, investors place more value on the transformation features of the token. Meanwhile, the token circumvents regulations in a way that makes it possible to distribute user’s tokens through decentralized applications (DApps)/native apps. In most cases, an ICO will avoid regulation and registration with SEC.
On the other hand, STO organizers stage their offerings with regulatory structures in mind. In fact, STOs are 100% lawful because they are formed after meeting all legal requirements and are also registered with government bodies. To launch an STO, one has follow a series of upfront compliance work. Hence, it is right to say that it is more difficult to launch an STO than it is launching an ICO.
Furthermore, an STO is not everyone’s business because only accredited regulatory compliant investors/companies can sell or purchase security tokens.
ICOs vs. STOs
Advantages of ICOs
- No restriction to entry for both sellers and buyers
- Positive network effects
- Independent funds management by the teams
- ICOs are formed on the basis of a well-executed digital campaign.
- Automated and simple token distribution
- Anonymous participation is possible
- A rise in coin price benefits investors, especially if the team delivers.
Advantages of STOs
- Investor security due to 100% regulation
- Underlying investor assets derive their valuation from something else
- STO projects are normally more mature and trustworthy than ICO ones
- STOs are an ongoing trend
- Less speculation and market manipulation
- Security tokens are the next big step in the Fintech given the fading power of ICOs
What are the Disadvantages
Disadvantages of ICOs
- High volatility
- Manipulation by the crypto market
- Low liquidity
- Common with scams, fraud and pump & dump schemes
- Unregulated nature makes them prone to risks
- Strict regulations could also cause problems for both investors and the projects
- Uncertainty in the idea
Disadvantages of STOs
- Green light from regulators takes costs lots of time, effort and money
- Limited only to accredited investors
- Requires significant amounts of financial power
As you can see, the pros and cons are quite clear and will help you make an informed decision; depending on your level of risk tolerance.