The concept of ICO dates back to 2013 when first ICO Mastercoin (now called Omni) was launched by J.R. Willett. ICOs came into limelight in the year 2017, when different startups generated 10 billion USD. This was followed by 11.4 billion USD in year 2018. The ICO market is down in 2019, around 97% in Q1 2019 (YoY), raising an amount of 40 million USD only in Q1 2019.
Following diagram shows funds raised by ICOs (in Million USD) from Jan 2017 to Apr 2019.
Scams, government regulations, untrustworthy and non-experienced team are a few reasons why ICOs launch are declining. In this relatively challenging climate to raise funds, new projects have switched from ICO to STO, perhaps in an attempt to assist with raising capital.
What is STO (Security Token Offerings)?
According to Cointelegraph, "Similar to ICOs, an investor is issued with a crypto coin or token representing their investment. But unlike an ICO, a security token represents an investment contract into an underlying investment asset, such as stocks, bonds, funds and real estate investment trusts (REIT)."
STOs is a hybrid approach between cryptocurrency ICOs and the initial public offering (IPO) because of its overlap with both of these methods of investment fundraising.
We have an increase in the number of STOs as regulatory bodies worldwide are creating environment tougher for the launch of ICOs. Following statistics shows that the number of STOs worldwide have observed a huge increase in 2019. Recording a QoQ growth of over 130% in Q1 2019. Seeing this staggering increase many experts believe that STOs, will eventually completely replace the ICOs.
Although similar in many aspects, here are some vital difference between ICOs and STOs that can help you understand these two fundraising method in the world of crypto.
The first and foremost difference between ICO and STOs are regulations. Most ICOs position their offerings as utility tokens to circumvent regulations. Tokens sold during ICOs are used to access the decentralized applications (DApps) or native platforms. With the exception of few almost all ICOs are free from any sort of regulations.
On the other hand, STOs are launched with regulatory governance in mind. They are registered with required government bodies, meet all the legal requirements and are 100% lawful. This regulatory compliance and registration with the government body gives protection to investor money and thus drive there confidence. In USA, an STO must be registered with the SEC as security and therefore has to meet the KYC (know your customer) and AML (anti-money laundering) regulations to keep a check.
The tokens offered in ICOs are utility tokens, they don't have monetary value or cannot be traded in the stock market. Moreover, anybody can participate in ICO crowdfunding.
Tokens offered in STO are actual financial securities backed by physical assets that can be a product (such as an app), an ecosystem (like Ethereum), a platform, or value-markers. As a result tokens purchased during STO can be traded, sold or held as assets by investors. STOs also have a requirement that only accredited investors can participate in token sale.
Return Over Investment (ROI)
Blockchain Capital is distinguished for being the first STO and raised 10 million USD. Spice VC a blockchain based venture capital fund raised 15 million USD during its STO crowd funding. For the development of platform for cryptocurrency loans, NEXO raised 52.5 million USD.
The average ROI of ICOs launched in 2017 is recorded to be 1,844.26%. STO's don't have such huge return for their investors. Blockchain Capital gain 161%, Spice VC went up to 31% and NEXO went down by 20%. Even with these low returns, STO investors still have confidence that there money is invested in legitimate project which is not a scam. Study of Satis Group LLC on ICOs concluded that, 81% of ICOs they analyzed are scams. Moreover, 6% had actually failed, 5% had gone dark and only 8% went to trade on an exchange. Success rate of STOs is way ahead of ICOs. Out of 328 STOs launched only 12 failed, showing a failure rate of just 3.65%.
The popularity of STOs has increased so rapidly that many in the financial sector consider 2019 to be the year of security tokens.