Security Token Offering vs ICO – what are the differences?


ICO, that stands for Initial Coin Offering, has recently been one of the hottest terms in the world of blockchain projects fundraising. This world transforms so rapidly, though, that soon ICO can be replaced with a brand new thing called STO (Security Token Offering). Rumor has it, at least. But is the thing really that new? And will the anticipated replacement actually happen? We answer these (and more) questions below, highlighting the main differences between ICO and STO.

The key to understanding what STO is and how it differs from ICO, is knowing what the ICO is in the first place. So here comes a brief explanation for all those who are somewhat new to the topic (or still happen to be a little confused about it). ICO is, to put it simply, a digital token that can be bought using cryptocurrencies in order to support a project. If the project succeeds, the value of the token increases, so it can be treated as an investment, too.

The whole idea resembles that one of the company stocks except for ‘stocks’ here are shifted to a blockchain-based smart contracts and virtually anyone can either buy or sell tokens of an ICO. There are no middle men involved and a company can get funding without help of e.g. banks and other institutions. All you need is basically an idea, a whitepaper, a website and a code. It may sound like a charm, especially to those young entrepreneurs who raised millions overnight thanks to it, but for the very same reasons ICO isn’t all so sweet in the end.

Security Token Offering as a remedy for the ICO problems

What seemed to be the perfect funding solution due to no regulations soon turned out to be a hotbed for fraudsters who never meant to deliver what they promised in the whitepapers. In 2017 over 80% projects, which of course caused much hesitation among many investors whether to invest in ICOs in the future. But here come Security Token Offerings that are believed to solve to the problem and thus be a real gamechanger.

The core idea remains quite the same, but Security Token Offerrings are in fact regulated, e.g. in the USA filed with the Securities and Exchange Commission (SEC, in the U.S.), they also take advantage of securities privilege such as Reg A+. The number of countries regulating blockchain market increases, with good examples of Switzerland and Liechtenstein. The amount of regulation in the US is immense. There is STO Reg S (for companies operating outside of the US), STO Reg D with its three variations: Rule 506(b) (with unlimited annual offer an withouth general solicitation), Rule 506(c) (with unlimited anual offer and with general solicitation) and  Rule 504 (with $5 mln annual offer limit and general solicitation permited in specified circumstances), Reg A with two tiers: one with $20 mln annual offer limit and the other with $50 mln limit.

STO benefits

The latter are less likely to use a registered company they’re investing in for so called illegal monetary activities. Therefore, the business issuing an STO is protected too, as far as both its image and possible legal trouble are concerned. Although the registration process itself is far more expensive and difficult, it is still not as complicated as the registration process for Initial Public Offers (IPO), while the STO still can be treated as real securities.

And they are, not only in the light of mentioned regulations, but also resembling shares in a way. The tokens issued in STO provide investors some rights to the company they invest in. The investors are entitled for example to be payed interest and dividends (or reinvest the STO into other security tokens) which ICOs only allow if they’re fair to their investors.


Will Security Token Offering replace ICO?

There are even more benefits of STO, one of them being the possible end of the strife between blockchain community and governments or other regulators that wanted to gain more control over ICO market. Many freedom-loving members of that community, though, argue that being subject to regulations and red-tape, STO are defying the original concept of ICO. The latter may thus remain a valid alternative to STO, as a part of dual token structure of the blockchain market.

It is worth noting, that the market is heading towards increased regulation. There are examples of smart regulation and mindless, bureaucratic regulation. The good example of well thought regulation is Lichtenstein’s “Blockchain Act”. It was widely discussed with various groups of experts and is expected to go live around August this year. This kind of well-thought legislation should be perceived as a herald of safer future for blockchain community with numerous advantages for both the entrepreneurs and their investors.

Of course, some basic rules of reviewing business model are the same for STOs and ICOs – you can check how to review an ICO in my other article.