Analysis | Differences in the four financing models of blockchain
The emergence of blockchain technology not only injects vitality into a new financial asset, but also provides a new business model for start-ups, and more and more new projects are trying to use cryptocurrency to finance. IPO is a widely recognized form of traditional external financing. Unlike IPOs, STO, IEO, and ICO are early stage financing companies and can avoid strict regulation. With the ICO, there are more than 1,000 cryptocurrencies on the market, and the number is increasing. ICO is now so common that many experts believe that ICO is similar to the Internet bubble incident of the late 1990s and could lead to the same devastating consequences.
This is probably why STO and IEO have replaced ICO.
Before discussing the differences between STO, IPO, IEO, and ICO, let's first understand their definitions.
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Definition of IPO, ICO, IEO and STO
An initial public offering (IPO) is an initial public offering of a company. Prior to the initial public offering, even if the company was incorporated and privately owned, the company's capital was allocated by the founder and the first investors. After an initial public offering (IPO), any natural or legal person who purchases the company's stock can become a shareholder of the company. The sale of the stock is carried out on the stock exchange, strictly subject to the financial regulatory authorities, mandatory disclosure of financial statements, establishment of the board of directors, regular conduct. Audit, etc.
There are many ways for investors to make a profit. The two main types are dividends and stock trading returns.
ICO refers to the first issue of tokens, that is, the blockchain project first issued tokens to the public. Since 2017, most startups have chosen ICO to circumvent the strict rules and regulations in early financing; the only thing needed to start ICO is a website with a wallet address, and ICO has no legal boundaries, no investor protection, completely anonymous, and Lack of minimal visualization products.
The exchange carries and manages the IEO. As the name suggests, IEO refers to the first exchange.
Typically, when an exchange sells tokens, the token issuer pays a certain listing fee and the percentage of tokens sold during the IEO period. Finally, after the IEO is closed, the token will be listed on the exchange.
IEOs don't send money to smart contracts like ICO participants. Instead, participants must create an account on the IEO's trading platform. The participants then deposit the token funds into their exchange wallet and use the funds to purchase tokens issued by the financing company.
STO is the meaning of the issuance of securities certificates, which means that investors hold the issued tokens to obtain dividends, voting rights and any rights applicable to other types of securities. The securities pass is classified as a securities and is subject to the securities laws of the country in which it is located. There are some exceptions. Usually, companies are registered under the exemption of the private equity regulation Regulation D (Note: This applies only to the United States), which eliminates the need for complicated legal procedures.
Another important aspect is that the issuance of securities passes allows companies to create lists of recognized and unscrupulous investors (so-called whitelists and blacklists), which helps companies comply with KYC requirements and the legalization of criminal proceeds. Public information helps to efficiently address the most serious problems in the sale of Utility Tokens, which not only increases corporate responsibility, reduces the likelihood of fraud, but also protects the rights of depositors when the company goes bankrupt.
Similarities between IPO, ICO, IEO, and STO
Most of the ICO, IEO and STO are raising funds for the commercialization of new technology concepts. Today's technology network is very similar to the situation in the 1990s. It is an economic opportunity brought about by the high expectations of new technologies (blockchains), rather than the stable profits generated by the actual business results of new projects. In addition, we are talking about intangible assets.
In order to launch ICO, IEO and STO, startups need to prepare a white paper that includes project objectives, technology implementation, funding required, the amount of tokens held by the project's founding team, and how they are used and the duration of crowdfunding activities.
STO is more like an IPO than ICO and IEO. Securities token issuance (STO) is similar to an initial public offering (IPO) on a blockchain. STO is regulated by a strict system and avoids illegal financing. In this case, the company generally sets its own goal to raise the amount of money as much as possible, without considering where the funds come from. In addition, these rules create real investment opportunities for institutional investors and may result in significant capital inflows into the blockchain industry.
Differences between IPO, ICO, IEO and STO
Degree of trust
IPO companies need to complete many requirements and specific operations before getting permission:
- Have a good reputation;
- Invite a professional audit company to review the finances and seek the support of the financial institutions.
Companies can safely sell their shares to people in the secondary market.
In general, ICO does not need to comply with any standards. Because in addition to the key features of the project described in the white paper, the ICO project does not have a realistic project to support its business vision. The current project can only provide future income, so the idea of a full audit of ICO is superfluous. For investors with an investment intention, the only thing they can do is to carefully study the structure and good business ideas described in the white paper. This is the main reason for the risk of investing in ICO. Although there is a view that careful study of the developer's experience can determine the success of the project, it is a mistake to put a company's success on someone's past achievements.
For IEO , its fundraising activities take place on the exchange platform and the exchange bears all risks. Investors can view projects that want to launch an IEO on their website to help investors eliminate some fraudulent and suspicious projects.
For STO , companies need to follow the same specific procedures as IPOs:
- The tokens provided should pass the Howey test (only for the US);
- Need to register tokens and comply with different national regulations (requires legal counsel).
2. Issuance of IPO, ICO, IEO and STO fees
Compared with IPO, the management cost of STO after listing is much lower. Compared with traditional investment banks, STO has a more direct and transparent access to investors and reduces brokerage fees.
There are many valuable companies that are skeptical about ICO without using this type of financing, and because of the complexity and cost, and not the IPO, STO has the foundation to facilitate such companies.
Compared with ICO, the benefits of IEO on the exchange are even more impressive. The company only needs to pay the listing fee and a certain amount of token sales. This not only saves the marketing budget required by ICO, but the token issuer can also use the stable customer base of the exchange to divert to its own projects.
3. Regulatory authorities and IPO, ICO, IEO, STO
IPO and STO legislation require companies that issue free-selling shares to be registered with the regulator; if a company has an exemption, the company does not need to register, whether it is an IPO or an STO. However, they must prepare a prospectus. In the prospectus, the company needs to explain how the funds used to sell the stock will be used, and there must be some transparency, disclosure of company information, business description, net asset value, company structure and placement plan. . The prospectus is divided into two phases: the initial prospectus and the final prospectus.
For the EU STO, there are some exemptions that allow it not to issue a prospectus:
- Securities issuance is only for qualified investors.
- The number of securities issued to each Contracting State shall not exceed 150, except for qualified investors.
- The issuance of securities is for investors. The total amount of each individual order for investors to purchase securities must not be less than 100,000 euros.
- The face value and book value of the issuance of securities shall not be less than 100,000 Euros.
- For each of the Contracting States' total considerations for one year, each of the securities with a total consideration of less than €2.5 million is required (Note: different Member States may choose different thresholds).
There is no legal requirement that ICO must provide legal documents to issue tokens, and the white paper contains all project-related information, which is not normative. The white paper points out the technical advantages of the project and the material benefits that may be brought to investors. If a potential investor thinks that the business ideas presented by the project are very attractive, they will put the money into it.
IEO token issuers don't have to worry about crowdfunding security and regulatory issues, because exchanges manage smart contracts, including KYC/AML processes that are also handled by exchanges, just as most service providers create KYC for customers after creating customer accounts. Same as /AML.
4. Strategic planning for IPO, ICO, IEO and STO
IPO is not suitable for start-up companies. Any company that wants to publicly issue shares through an IPO must maintain a stable financial income. Potential investors are not interested in companies that need help to grow from the cradle. The IPO is to support the company's expansion and bring dividends to the company's shareholders.
Startups that need funding to support their ideas can turn to ICO, IEO, and STO. These financing methods apply to all projects that express their ideas in the white paper and want to win the favor of potential investors.
5. Time period
It takes a while for IPO and STO to resolve all legal requirements, and the company will not be allowed to conduct crowdfunding without legal permission. Resolving these legal requirements can take up to six months. This process is inseparable from the participation of the regulatory authorities, and the review by the regulatory authorities is very strict and there is a right to suspend the application.
If the project idea is well represented in the white paper and a smart contract has been created, then it will not take much time to start ICO and IEO. The crowdfunding cycle depends on the speed at which the project reaches the hardtop or the project sponsor decides the crowdfunding deadline.
6. The importance of location
IPOs can usually only be carried out in jurisdictions where the company operates. If the company conducting the IPO has a certain business in a neighbouring country and the brokerage bank allows it, it can also be carried out in some neighbouring countries.
STO does not have this problem, you only need to have an account on the STO platform to participate. The issuer can set a release limit, that is, the issue is limited to jurisdictions that register and comply with the securities pass (for example, the European Union). STO does not require local applications, which is a considerable benefit for increasing the number of investors.
The same is true for ICO and IEO. The IEO may have some restrictions on who can create an account on the exchange, although there are no prohibitions or restrictions on the exchange to launch the IEO.
to sum up
Entrepreneurs are tired of fighting regulation, they don't want to give up ownership, they don't want to spend millions of dollars on marketing and develop a seemingly useless product, financing is the best option.
In terms of financing methods, STO is undoubtedly a better choice, which brings together the advantages of ICO and IPO to protect start-ups and investors.
The charm of STO lies in its core is a securities certificate supported by physical objects (gold, real estate, stocks and even rare works of art), and the benefits are higher than ICO, IEO and IPO.
Note: The original source is Medium.com, and the translation is provided by First.VIP. Please reprint the information at the end of the article.
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