Blockchain-based businesses require capital to operate. The issue that comes into perspective in this regard is to raise capital through Blockchain-specific models which are either Initial Coin Offerings (ICO) or Security Token Offerings (STO). These two platforms are the best option for crowdfunding as they are easier to initiate.
STOs and ICOs are critical to the majority of businesses that do not meet the minimum threshold for participating in stock markets’ initial public offerings (IPOs). Additionally, the capital sourcing approach is simple, straightforward, timely, and often successful.
Initial Coin Offerings (ICOs)
ICOs are the simplest strategy for raising startup or developmental capital for a Blockchain-based business. In this type of crowdfunding, Cryptocurrencies such as ETH, or BTC are raised in exchange for utility Tokens that act as “units of shares” to the Business. Afterward, the business can convert the proceeds to fiat money to fund the project if need be.
It is important to note that the “coins” in ICOs are not secured against assets of any kind, not unless the Tokens are stablecoins. This has the implication of convincing investors that they are buying units of the company, but in actual sense, they are contributing to a project and getting proof-of-work/stake Tokens that have the ability to gain exponentially when the business project matures. The new users will require the Coin to use the network and raises the demand for Tokens along with the value in the process.
Additionally, investors may be prompted to participate in the ICO in the hope that the Cryptocurrency for the platform may become a major part of Cryptocurrency markets such as BTC, XRP, etc.
Security Token Offerings (STOs)
STOs are a hybrid form of ICOs where Digital Offerings are real securities like in stock markets. In this type of fundraising, Tokens are secured against assets such as profits or shares. Further, STOs are regulated by regulatory agencies such as the US SEC. This means that investors are protected from rogue issuers or security breaches that Blockchain platforms and wallets are prone to. When investors contribute to STOs, they expect to gain when the company makes profits or the securities appreciate.
Deciding Between STOs And ICOs
ICOs have been prone to fraud and many investors are viewing them with suspicion. This problem is further worsened by the fact that ICOs are unregulated, decentralized and completely autonomous.
However, ICOs are the best option for Blockchain-based companies that have a native utility Token. It is vital to note that spectacular performance in Crypto markets and the huge prospects for bull runs are the main drivers of the growing ICOs popularity despite the risks. Hence, as long as the idea appeals, an ICO can yield good results.
Meanwhile, STOs are best for business ideas that do not involve a native utility Token but rather serve as Blockchain-as-as-Service platform. For instance, in the US and Europe, STOs have provisions under the law that are beneficial to investors by protecting them while ensuring that small and startup businesses can easily participate.