Whether you are a fundraiser or investor looking at token offering methods as a way forward to build a thriving business, you need to consider various options.
Making the correct choice between an Initial Coin Offering (ICO), an Initial Coin Offering (ICO) or a Security Token Offering (STO) could be the difference between success and disaster.
And perhaps common to all projects is this: “First and foremost, the blockchain project has to make sense. Will this idea make sense in five years from now? Does the idea tackle a large enough and growing market?” Ziad S Nassar, Co-creator @ Gozo Travel OÜ, Tallinn, Estonia, told AMEinfo.
“The challenge for the investor is to find the A team with an A idea. The saying goes, it is better to invest in an A team with a B idea before investing in an A idea with a B team?”
We explain these offers below.
In 2017, ICO was on the peak of its popularity.
Investors offer their funds, and project developers offer crypto coins and tokens. These coins and tokens are used on the blockchain where the project is being developed. Investors can also use these “utility tokens” to gain access to the product/service the ICO organizer has promised to develop.
This attracted many investors such as amateur investors, small companies, and coin owners because ICOs required a low minimum to get in the action.
According to CoinSchedule, ICOs raised more than $37.5 billion between 2017 and 2018.
ICO works fine as long as you manage to find a respectable project developer.
But unfortunately, in most cases that wasn’t true. Many project owners took advantage of the naivety of these investors whose due diligence abut the company owners, product (crypto-token) offering and future viability fell short of what veterans are able to perform.
ICOs don’t have any assets to back them and lead to a possibility of fraud.
That’s why many investors are moving away from ICOs and considering IEOs.
With IEOs, the sale of crypto tokens is done on an exchange platform, a third party that stakes its reputation and often becomes part investor in order to make the venture work. The exchange also pre-checks the owners’ credentials and evaluates the chances of a project becoming successful.
Collected funds aren’t sent to the smart contracts as they are during an ICO. Everything is done through an exchange to keep the risks to a minimum.
According to experts from IBCGroup, IEO is a preferred method for the majority of investors.
The catch is that the IEO method require high investment minimums, and there is only a small choice of IEO platforms to choose from.
“In the Middle East I feel that IEO will be the best way for entrepreneurs to fundraise and take they projects forward. Exchanges guarantee that due diligence have been done and that someone has checked the boxes for you. For Memob’s blockchain, we decided that the best way to take forward this revolutionary approach was to have an IEO,” Alexandre Hawari, CEO, Memob, told AMEinfo.
STOs are the most difficult and complex fundraising scheme for both investors and project starters.
STOs offer security tokens (cryptos) operating and recorded on a blockchain. The tokens are backed by assets, which turns them into real securities.
Buying such tokens is similar to investing into real stocks and bonds. They are secured by KYC-AML processes and other regulatory protections.
“Many institutional investors are leaning toward STO investments because STOs typically represent actual ownership of an underlying asset, such as a stock or a bond in the company,” Nassar told AMEinfo.
“When comparing ICO and IEO, the non-institutional investor, would be better off focusing on IEO, as such, the exchange offering the token or coin for sale is providing an extra filter, or layer, of due diligence. Exchanges see a variety of projects and want to select those that would perform well, increasing the likelihood of success for the investor versus a typical ICO.”
Summary of offerings’ pros and cons
According to freewallet.org, each type of offering has its pros and cons.
Low entrance level
Free tokens via airdrop and bounty programs during the ICO campaign
Lack of fraud
Tokens backed by assets, have real value
High entrance level
Have to wait until tokens are listed on an exchange before trading starts
Reputable exchange platform ensures a trustworthy project
Tokens are listed and traded immediately after a tokensale
They are still utility tokens, which are not backed by real value
Ahmed Jacob, Dubai-based Managing Partner and CTO of INVAO told AMEinfo: “The investment proposition as well as the regulatory framework are entirely different for all the structures mentioned above. The kind of investment vehicle an investor may want to participate in, depends on each investor’s individual investment preferences. In general, the regulatory and legal certainty with STOs is significantly better compared to ICOs and IEOs.”
For his part, Julien Hawari, CEO – InfakCorp – The first Islamic Fintech Ecosystem and Advisor – Capital Crypto Bank – Crypto Advisory Firm, told AMEinfo: “For this region, an IEO will be the best way forward. Because of the heavy burden of local legislation and infrastructure when it comes to blockchain and crypto, ICOs will be difficult to sell to regional backers who will be worried. An IEO brings more sense of security by having a trusted third party that does part of the due diligence. STOs will take time in the region and will face many hurdles.”
Other important facts and figures about the offerings
According to freewallet.org, STO buyers should be accredited players of the market. According to US law, individuals need to meet at least one of the following requirements:
An annual income of more than $200,000 per person or $300,000 for a married couple
Net assets of more than $1 million
An organization that has assets over $5 million, for example, a venture capital fund or a trust fund;
A company whose members are all accredited.
Blockchain Capital was one of the pioneers of STO offerings. It raised $10 mln. within a few hours. Spice VC is a blockchain based venture capital which got $15 mln, during its campaign. NEXO platform has raised $52.5 mln. for the development of a popular platform for cryptocurrency loans.
On average, STOs perform better than any other fundraising model. For STOs, the average funds raised per project is $85 million while that number is only $17 million for IEOs and $10 million for ICOs. Interestingly, all three models performed better than traditional Venture Capital.
But compared to ICOs, as you will see, these STOs didn’t bring huge returns for their buyers. Blockchain Capital had 161% gains, Spice VC buyers got 31% and NEXO has even gone down in value by 20%.
The most popular ICOs were held early by Ethereum, EOS (open-source blockchain protocol ) and NEO (open-source blockchain decentralized application platform) which raised millions of dollars in just a few weeks/days/minutes.
Later, a successful ICO was performed by Telegram for the TON network which garnered $1.7 bln. in a private sale.
Other ICO examples:
Ark sold its tokens for $0.01. Recently, it traded for $0.586. Its all-time-high was $10.91.
The price for NXT token was only $0.0000168. Today, it costs $0.033 and its all-time-high price was $2.16 per token.
Ethereum was selling its tokens for $0.311. Today, its price is around $250 per coin. The highest price was $1432.
For IEOs, one of the most successful recent IEOs was:
BitTorrent, a popular file-sharing project with 100 million monthly active users, which sold the Token BTT at $0.00012 on Binance Launchpad at end Jan. 28, 2019, raising $7.2 million. Currently, BTT trades $0.001248 and ROI in USD is at 940%.
But in May, Ocean Protocol, an ecosystem for AI data managing and associated services offered its token OCEAN as an IEO Platform on Bittrex International and raised $6 million. The initial IEO price was at $0.12 and the current price is $0.027, an ROI in USD of -78%.
Currently, there are several active exchanges which perform IEOs: Binance, OKEX, Huobi etc. and more are set to be launched in the future.