ICO from a newcomer perspective
What are Tokens?
Tokens are a reflection of virtual resources whose value is expressed by fiduciary money (FIAT) and which can perform different functions (a means of payment; a sign of participation in companies and partnerships; a tool to create ICOs).
What in fact is the ICO?
The Initial Coin Offering (ICO), aka the Initial Public Coin Offering (IPCO), is a typical form of raising capital through crowdfunding by means of tokens offered by a company. The aim of the ICO is to collect funds for investments and creating a new project or developing an existing one. The whole sales process is based usually on smart contracts, thanks to which potential investors can verify a project.
Utility Tokens give access to a company’s products or services and serve as a means of payment for the latter. Tokens offered in the ICO should be treated as a prepaid voucher which will be used in planned applications or products.
Security Tokens are a form of ownership. They reflect possession and have features similar to the Initial Public Offering (IPO). The IPO is a process where a company enters a stock market for the first time and offers its shares to the community. A need to raise additional funds for development is the main reason for presenting IPOs by companies.
If the price of offered tokens rises with an increase in a company’s value, such assets have features of securities (shares of a company). The stock exchange is governed by law. Since the token must meet determined criteria, investors treat it as a kind of securities.
Security Token is still a rather unpopular tool, but it has a higher advanced market usefulness and potential than Utility Token.
Security Token can be identified based on the so-called Howey Test. The test is to show if a token meets the following criteria:
- gives a chance to invest money with a right to profits from a company’s activity
- invested money brings profits which are solely the result of efforts of other people (not investors themselves).
What is the STO?
The Security Token Offering (STO) guarantees more security for investors and financing, as it is based on assets and income of a company which issues tokens. It is estimated that the STO may replace the ICO in 2019 combining the traditional financial system with blockchain sector.
Advantages over the conventional market:
– unlike the typical stock market, cryptocurrency exchanges are open all week long, which enables greater trade liquidity;
– when in a complicated project shares are offered to many investors, the sales process is accelerated and thus more concurrent transactions can be made;
– better access − different tokens (f. e. in the Ethereum network) are stored in one wallet;
– implementing the concept of joint investments (many shareholders). Such investment models are available on the market, but usually they are used locally (not beyond small communities). Security Tokens allow an individual to be both an investor and a shareholder in a project. Thanks to such a solution even investors with small capital can participate in investment profits;
– instant transactions (made in real time).
In the world which is becoming more and more decentralized, the STO is a logical outcome of the way in which new business models can function. In this sense STOs are necessary, as they give investors more security. This viewpoint is in accord with leaders of many economic areas who are claiming more and more often that the ICO should be changed into the STO. Offering digital tokens in the latter form increases investment security and meets all legal criteria.