IPO, ICO, STO & ETO – was ist die Zukunft der Kapitalbeschaffung?

First Bitcoin was mined 10 years ago which can be treated as a symbolic birth of the crypto market. During this time, we have experienced many revolutionary ideas, time of abnormal volatility of cryptocurrencies prices, as well as a sudden and turbulent decline of many projects.

Without a doubt, one of the biggest phenomenon in the recent years was the growth (and decline) of the ICO market. What are ICOs? How do they differ from traditional IPOs? What is the future of fundraising in crypto markets? Let’s try to find answers to these questions.

Initial Public Offering (IPO)

IPOs are the most common way for companies to raise capital. Initial Public Offerings are very often described as “going public” since by definition this term means the very first sale of company’s shares to the public (before IPO a company is considered “private”). Company’s shares sold in IPO become “liquid” assets, they are traded on stock exchanges such as New York Stock Exchange, Deutsche Boerse, SIX Swiss Exchange where they are available to basically any investor.

The most important issue in case of comparing IPOs to ICOs is the subject of the offering. In IPO, companies sell their shares with all corporate rights (dividend rights, voting rights etc.). Shares are considered securities and the public sale of securities is highly regulated in financial markets. To conduct an IPO, a company has to comply with a set of requirements stated by regulatory bodies (such as US SEC, German BAFIN, Swiss FINMA), prepare and publish investment prospectus with detail information about IPO, report auditable financial statements (most often on a quarterly basis) etc.

In general, IPOs are highly regulated, time intensive and costly fundraising tools for companies, which on the other hand offer an opportunity to receive significant capital injection, which would not be available via bank loans, venture capital funding and other financing sources.

Initial Coin Offering (ICO)

The similarity of IPOs and ICOs are a common misconception in the crypto industry. Although both offerings have a common goal (raising capital), the way this goal is achieved and, most of all, the level of protection the investors are granted, is a completely different story.

Initial Coin Offerings are sales of cryptographic tokens to “project’s backers” in exchange for other cryptocurrencies (Bitcoin, Ether etc.). When a company / project organizes an ICO, it basically sells so called “coins” or “tokens” to the public (consisted of so called “backers”).

The main difference between ICOs and IPOs is the subject of the offering. In IPOs, companies sell their shares (securities). Shareholders automatically receive certain rights like:

  • the right to receive dividend payments,
  • voting rights to shape the company’s policy and business plans,
  • the right to buy new shares (so called preemptive rights)
  • ownership in a portion of a company (eg. in the event of liquidation),
  • the right to sue for wrongful acts.

All these rights are the true drivers defining shares’ intrinsic value. All shareholders will benefit when the company’s business plan will succeed and its profit (and dividend) will increase. The better the prospects of a company, the more valuable its shares are.

In case of ICOs, companies (or sometimes just “projects” without any incorporation), sell coins or tokens. These instruments do not represent any ownership of the company, rights to receive dividends or even influence project’s plans or roadmap. The value of newly-issued digital cryptocurrencies is not linked to the success or failure of a project or its profitability which is the greatest risk and disadvantage of investing in ICOs. Generally, it is said that the price of newly-issued coins / tokens will grow if the “technology” will become successful. However, the truth is that even in such a positive scenario this does not necessarily have to be true.

The lack of connection between the value of coins / tokens in the ICO to any business related metrics of a project has created a pathological situation which resulted in many fraudulent ICOs.

In general, backers in ICOs buy coins / tokens without any underlying value and protection only with a hope that the prices of these newly-issued digital currencies will grow if the technology will become successful. ICOs don’t operate in the regulated area of financial markets; hence, backers / investors are not protected by any laws and regulatory supervision authorities.

Equity Token Offering (ETO)

At this point, you may wonder what would happen if we would simply mix the properties of both IPOs and ICOs. In case of IPOs, the largest advantage is the subject of the offering – securities which represent a real intrinsic value guarded by the financial regulations imposed by SEC, BAFIN or FINMA to protect investors. On the other hand, we have ICOs with their overwhelming digitalization and the general “ease” of raising capital.

This is how so called Security Token Offerings have originated. STOs from a technological point of view are effectively organized in the same way as ICOs. However, in STOs investors are effectively purchasing a regulated financial security – asset-backed financial instrument, bond or company’s shares which is offered in a tokenized form. When the subject of Security Token Offering are company’s shares (equity), the sale is called Equity Token Offering (ETO).

In ETOs companies still have to adhere to financial regulations in particular jurisdictions, prepare and publish an investment prospectus with details of the offering and comply to all other requirements established by regulatory bodies. Thanks to this, investor rights are highly protected by law. However, thanks to the tokenization and digitization, ETOs are a hassle-free, simple and transparent method of a fundraising which right now has become available to companies looking for growth capital.

In some way, you may say that ETOs have become new IPOs adapted to the current digitally advanced financial world.

Block Stocks

In Block Stocks, we have prepared a legal and technological environment for companies looking for fundraising opportunities in the form of Equity Token Offerings. You may learn more about our tokenized equity fundraising platform here.

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