A cryptocurrency is a digital /virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature.
It is not issued by a central bank or government. Hence, it cannot be influenced or controlled by them.
Initial Coin Offering (ICO)
An Initial Coin Offering (ICO) is the cryptocurrency equivalent to an IPO. ICOs act as fundraisers for a company looking to create a new coin, app, or service.
Interested investors buy in to the offering, either with fiat currency or with pre-existing digital tokens like ether. In exchange for their support, investors receive a new cryptocurrency token specific to the ICO. Investors want the token to perform exceptionally well into the future, providing them with a stellar return on investment.
The company holding the ICO uses the investor funds as a means of furthering its goals, launching its product, or starting its digital currency. ICOs are used by start-ups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks.
During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed crypto coins with virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an IPO-type transaction.
If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.
Like IPOs, a stake of the startup or company is sold to raise money for the entity’s operations during an ICO operation. However, while IPOs deal with investors, ICOs deal with supporters that are keen to invest in a new project much like a crowdfunding event.
But ICOs differ from crowdfunding in that the backers of the former are motivated by a prospective return on their investments, while the funds raised in the latter campaign are basically donations. For these reasons, ICOs are referred to as crowd sales.
ICOs also retain at least three important structural differences from IPOs.
- ICOs are decentralized, with no single authority governing them.
- ICOs are largely unregulated, meaning that government organizations like the U.S. Securities and Exchange Commission (SEC) do not oversee them.
- Finally, because of decentralization and a lack of regulation, ICOs are much freer in terms of structure than IPOs.
Security Token Offering (STO) definition
A Security Token Offering (STO) is quite like an ICO, but there are two key differences.
- STOs are regulated by government authorities.
- These are asset backed tokens, which means they have a monetary value in the real world.
Hence STO’s are safer for an investor than an ICO.
The extra safety comes at a cost as the company must complete onerous paperwork upfront to ensure it is following the government regulations.