Entrepreneurs have now started their fundraising strategy without going through the routes of regular platforms such as Bank loans, VC, etc. With the Internet age, they have started to dig out popular methods which can be a painless task to perform.
One such platform is Indiegogo which was being launched in the year 2008 and has uplifted funds accounting for $34 billion in the year 2015. These online platforms are now hunting the strategies for startups to kick-start with their unique ideas.
When it comes to Blockchain projects, Initial Coin Offering was the popular fundraising strategy till the date. In the year 2017, it was the best approach which has helped plenty of startups to raise their funds.
According to a report from Fabric Ventures and TokenData, it was being said that ICO’s have managed to uprise more than 5.6 billion dollars. Out of which, 435 projects alone raised the funds for around $13 million.
However, in the year 2018, everything turned upside down. The first half of 2018 has recorded a 68% downfall according to the EY study. Though crypto enthusiasts are trying to secure Initial Coin Offerings from the downfall, the new fundraising strategy has emerged as an alternative to it. Startups have now looked around, yet another appealing strategy, named as Security Token Offering!
An In-Depth Evaluation of ICO’s:
Undoubtedly, Initial Coin Offerings have eliminated most of the hurdles with Venture Capitals and other traditional fundraising platforms. The primary advantage of this platform compared to traditional ones is ICO’s issues coins or tokens which can bring in a lot of benefits to the investors.
These ICO’s are similar to IPO which were the strategies used for fundraising. ICO tokens are created on Ethereum blockchain with ERC-20 standard and hence were called as ERC-20 tokens. In addition to Ethereum, there were other blockchain platforms which support the creation and issuance of tokens and coins.
With this, many investors came forward to buy ICO’s. Moreover, there are no restrictions on who should own an Initial Coin Offering. Once they have the right guidance and desired experience, they can get started. While the regulations of ICO’s are still in the early stages with no uniformity.
Anyhow, there are problems prevailing with this method in the form of scams. The reason for the scams is ICO’s issue equity tokens which aren’t much secured according to SEC Guidelines.
Due to several cases of failed projects and scams, ICO’s are experiencing a downfall in the market. Since they are not regulated, there is no verification process involved. Added, projects & products are immature, investors have a fear to get started.
Why do investors need to be wary of ICO’s?
Let me explain to you the example. You would probably know BitConnect, one of the open-source cryptocurrency. BitConnect has launched its ICO in the November 2016 and closed its crowd sale on December 2016.
It has raised only 468 Bitcoins which accounted for $410,000. Yet another uncommon thing is, they haven’t released the ICO Whitepaper during their launch! Everything was anonymous! Finally, it was termed as an unsuccessful ICO.
Yet another example is Tezos which is a crypto project that raised $230 million on ICO’s alone. But anyhow they too experienced a downfall! In August 2018, it fell away to $7.5 million which proved why ICO’s aren’t the right fit!
Therefore investors need to be completely aware of ICO before getting started! The decline of ICO project success had opened the door for a new fundraising strategy called Security Token Offering.
Hence here are the major reasons why ICO cannot be a perfect choice for your project:
- Can attract a lot of scammers
Since there is only a little paperwork involved in Initial Coin Offerings, it can attract lot of scammers in the market. These people can hence create a fake white paper and start making money.
- Not the right time
If you take ICO projects like BAT, it got ended in just 24 seconds. However, they made around $35million. The shocking part was lot of people couldn’t participate in them and bunch of tokens were owned by a single person! This was really shocking indeed!
- Based on pure speculation
When you are investing in ICO project, you should initially read the White paper clearly. If the White paper has the desired reasons for your project, you can start investing in it. Most of the startups usually fail, on investing in wrong ICO projects which aren’t credible to go with.
Why Security Token Offerings?
STO’s have emerged as an alternative for Initial Coin Offerings. As the name suggests, the tokens issued here are completely secured. Moreover, in order to eliminate the scams involved in ICO, the SEC imposed a few guidelines to be followed. Once the tokens satisfy these criteria and pass the Howey Test, they are called as Security Tokens.
STO’s provide a fantastic and innovative way by providing greater transparency.
Security Token Offerings eliminate the need for Middleman and thus making the process more secure.
This can reduce the trading fees, and enable a good number of investors to participate in the process. Security Token Offerings represent fractional ownership of the assets and would reach the next stages of fundraising segments.
They can lower the risk of investments since they are enforced by federal regulations. To make sure, STO’s are complaint legally, the company should initially work within regulatory frameworks. Failure to do so will result in shutdown the non-compliant projects.
Here are a few reasons why STO can overtake ICO in the upcoming years:
- Regulations
STO’s are built with regulatory compliance which has attracted large investors. This could enrich the crypto space with new players which enhances the efficiency of the market.
- High Grade
Utility tokens are developed with the motto of allowing investors to access only the company’s services or products in the future. While Security Tokens give voting rights, equity/debt positions, etc.
- Transparency
When compared to Initial Coin Offerings, STO’s are highly transparent. It allows the investors to know the complete information about the company issuers. Security Tokens are designed as an immutable transparency framework which is making it more powerful than ICO’s.
- Micro Investments
On comparing STO’s with ICO’s, Security tokens eliminate the low barrier for investors to enter into the crypto industry. This has paved the way for new investors who could make micro-investing mechanism which was being previously restricted in Initial Coin Offerings.
STO VS ICO: Conclusion
The sad and bitter truth for ICO’s is, they were functioning as a money-making machine for the investors till the date. According to the report released by BitMEX, it has been indicated that the ICO market is down around 97% for the year 2019, based on the capital raised. It is said that ICO’s have somehow managed to raise the funds around $40 million.
To sum it up,
Security Token Offerings is already here and will be present in the upcoming days. This world of the new token pattern can totally restructure the crypto space. It is expected that there is a huge set of projects which opt for the security tokens in the future.
