You don’t need to be an investment expert to be aware of the fact that companies have quite a few options to rely on if they want to raise capital, except the classic loans.
Obviously, one of the most popular is an IPO – initial public offering – which is basically selling shares on the stock market. A lot of big companies, Twitter being one of the best examples, have done it successfully, and we’re convinced that we will see even more doing it in the future.
Still, nowadays, thanks to the rise of this phenomenon called tokenization, a lot of companies, including the smallest of startups, can raise funds by offering either digital tokens or tokenized securities, therefore creating an incredibly broader market.
In the following minutes, we are going to talk, besides IPOs, about ICOs, ETOs, as well as STOs, covering all the differences between them.
IPO – Initial Public Offerings
As mentioned above, this is one of the oldest and, why not, the most established methods of gaining capital. Simply put, a company who wants to start an IPO begins selling shares to investors, in order to trade them on the stock market.
In most cases, an IPO is referred to as “going public”, since the company makes the switch from being a private one. Still, in order to do this, they must adhere to a very strict set of rules and regulations, since it will eventually be part-owned by several outside investors.
Currently, IPOs are considered quite prestigious and not just any company can ‘apply’ for one since this is a method of funding reserved for bigger companies. Also, in most companies, this falls under the jurisdiction of the body looking over the stock market. For example, in the United States, they are regulated by the Securities and Exchange Commission.
ICO – Initial Coin Offerings
If you’re at least familiar with cryptocurrency, then you must have heard about this term – a lot, actually – over the past year. Simply put, an ICO is somehow the equivalent of an ICO, but it applies to the cryptocurrency market.
The initial coin offering itself involves the sale of cryptographic tokens to a group of early supporters of a project, in exchange for, in most cases, Ethereum, but there were cases in which other cryptocurrencies were accepted as well.
When comparing ICOs with IPOs, there’s a major difference we should take into consideration: initial coin offerings don’t come with ownership rights to the company. Basically, investors simply purchase tokens, but their value is indirectly linked to the success or failure of the project. Also, they don’t get the right to contribute to the future plans of the company they invest in!
In contrast, somebody who buys shares during an IPO can have a say on the plans of the company, as they have the rights of a shareholder.
Finally, another important aspect about ICOs is that investors should be aware that once purchased, they have full control just over the token, while the actions of the project’s developers are something they can’t influence at all.
The risk level is also very high, as in the past, but also nowadays, a lot of scammers are trying to defraud investors. Therefore, make sure you conduct some serious research before deciding to bet on a new ICO.
STO – Security Token Offerings
As soon as new financial regulations were imposed by the SEC – but also on the premise of a lot of ICOs failing – new models of funding appeared. And the security token offering is one of them.
Generally speaking, if functions in the same way as an ICO, but the main difference is that when investing in a company, you are actually purchasing a regulated financial security, but in a tokenized form. Simple as that.
A lot of companies which weren’t involved into ICOs initially adopted this funding model, offering tokens redeemable for, as an example, precious metals. Others went one step further and offered tokens backed by real estate. And the list could go on, as some companies were incredibly creative.
There’s no doubt that an STO is significantly more constricted than an ICO, but investors may be a bit more comfortable with investing into one, considering that the degree of risk is reduced since the concept itself is associated with regulation.
ETO – Equity Token Offerings
And last, but not least, we also have the ETOs, which appear to be the next big thing in terms of funding. We’re talking here about a type of securities token offering, obviously, which enables companies to raise funds by offering digital tokenized shares to investors.
In return, those who are looking forward to betting some money on a project, are receiving tokenized equity holdings. These are a claim on the company’s current or future assets and could come with additional voting rights as a shareholder. And this is one of the main reasons why they are already incredibly popular. Low risks, almost-guaranteed returns and some rights as a shareholder. Looks like pretty much the ideal funding method, don’t you think?
However, it’s not as simple as it looks, for both companies and investors.
First thing first, as a company, you must adhere to a set of strict financial regulations, in particular jurisdictions. Then, you need to prepare and publish a prospectus of investments, including all details of the offering, but also comply with all the requirements regulatory bodies need. All these are needed for investors to be protected by law.
On the other side, since we’re talking about tokenization, and ETO can still be considered a simple and transparent method of fundraising. If you want, we can call ETOs the new ICOs, but adapted to a digitally advanced financial world.
So we’re now looking at the real deal, as it appears that people want to tokenize everything that ever existed on a traditional platform. Which is not necessarily a bad thing. Whether we’re talking about real estate, bonds, public or private equity, gold, or even startups in early stages, building an ETO seems to be the best way to fund a company doing something related to these.
There are a few names in the game that managed to develop some incredibly successful ETOs and we won’t be surprised if their number will constantly grow and even surpass ICOs in popularity.
But hey, we’re still talking crypto here. You can never know when everything crashes overnight and lose everything. Still, these ETOs look like they are something different…