Understanding The Differences – IPO Vs ICO Vs STO Vs IEO
The most conventional and best known way of raising capital has always been the IPO, the first Public offering took place in 1602 and IPO’s have been part of the investment landscape ever since. Over hundreds of years the concept of an IPO and the buying and selling of shares became widely accepted. As of 2013 the idea of an ICO entered the investment realm and other variations as well; like the IEO and STO which are even newer concepts. Let’s further explore each to better understand the differences and similarities.
IPO is the most traditional way for a private company to raise capital by going public. IPO stands for “Initial Public Offering” and this essentially refers to an announcement made by any company wishing to invite investors to buy a partial ownership in their company, investors can do so by buying its shares. If a company wants to move forward with a public offering they must first select an investment firm to be their underwriter, after which point there are many regulatory requirements they must adhere to, including but not limited to filing a registration statement with the SEC (U.S. Securities and Exchange Commission).
An ICO is an “Initial Coin offering”, this shares a very similar goal to that of the Public Offering, whereby a company wishes to raise external capital for funding. The first ICO was held by Mastercoin in 2013 and subsequently many more ICO’s were held from 2016-2018 (raising billions of dollars in the process). ICO’s became very popular after the launch of Ethereum, this was mainly due to the fact that the Ethereum blockchain allowed for the easy creation of smart contracts, including the ERC-20 protocol which was the most widely used method of creating ICO’s. Many believe that Ethereum’s meteoric rise had much to do with the ongoing purchasing of ETH by ICO speculators. Speculators were simply buying Ethereum because they wanted to invest in an ICO. Several companies that held ICO’s were investigated by the SEC and subsequently the SEC determined that their ICO’s were in fact Securities and as such required registration with the SEC. Since these companies did not register their ICO’s with the SEC prior to raising the capital they were fined millions of dollars.
An IEO is very similar to an ICO, however, unlike the ICO, an IEO is operated directly by cryptocurrency exchanges on behalf of a startup that wishes to raise capital. Only the members of a specific exchange can participate in an IEO and buy the tokens, whereas, the ICO is -in practical terms- is open to all. Some IEO’s have been very successful, The second IEO on Binance was called Fetch.AI and it managed to raise $6 million in just 22 seconds. All this being said, it seems IEO’s are being investigated by the SEC as were ICO’s.
STO is a funding model for companies that have assured revenue earnings and have a considerable value. While the majority of ICO’s represented no value, but rather a probability of future earning, the STO has some value equal to that of the underlying assets. Where the STO really shines is compliance (this is not to say that all STO’s are compliant). In theory an STO is a regulated token offering that should register with the SEC or can attempt to use an available securities exemption like Reg A+ to proceed. Companies that are registering an STO must file documents that become accessible to the general public through the SEC’s EDGAR database.
In summary; we have seen that all the IPO, ICO, IEO and STO are all ways of raising capital for a company and/or project. Where they fundamentally differ is their compliance with securities laws and their focus on raising capital for unproven ideas backed by nothing vs raising capital founded on an underlying asset.