The principle of crowdfunding gets a new boost due to the use of different token types. While collecting investor funds used to involve a lot of effort, today this process can be implemented inexpensively and efficiently. It doesn’t matter whether donations are collected privately or on business.
Due to easy accessibility and low costs, many projects which might have failed due to financing can be realized. The use of blockchain technology and smart contracts in particular is considered a pioneer in ensuring the security of financing. Costly intermediaries are therefore superfluous and the proof of investment is stored unchanged on the blockchain.
However, there are differences in the form of financing, which largely depend on the type of company. Depending on profit and the type of project, different options, including IPOs, ICOs, STOs, and IEOs, can bring different advantages. Today, we’re about to consider them in detail!
Initial Public Offering (IPO)
The classic form which allows investors to participate in a project is the Initial Public Offering (IPO). This refers to securities that will later be traded on exchanges. To provide the financing of a company, investors can invest in the project at an early stage and receive shares for a lower price.
However, this is also associated with a higher risk, since the selected project is still under development and can fail. Likewise, it usually takes a long time before the first profits from the investment can be realized.
However, there are a number of regulatory precautions to be taken to start an IPO. These are usually very expensive and involve lots and lots of jobs. For this reason, only institutional projects can use this option. Depending on a legal situation, the necessary steps must be planned, initiated, and made transparent.
Advantages of an IPO
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- High security due to regulation;
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- Popular and well-tried among investors;
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- Broad sphere of activity.
Disadvantages of an IPO
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- Great effort for planning and implementation;
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- Very long-term development;
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- High costs.
An IPO is therefore mainly suitable for large companies that are about to trade their shares on a regulated stock exchange. It’s also often difficult for private investors to participate in an IPO, as a large number of shares may have to be acquired. This form of crowdfunding is therefore increasingly aimed at large and wealthy investors.
Initial Coin Offering (ICO)
ICOs rely on blockchain technology as the basis for security and thus make expensive precautions unnecessary. Many projects are based on the ERC-20 standard and therefore use Ethereum blockchain. Different token types can also be used to implement specific projects.
The financing works on the principle of tokenization. Instead of issuing security to investors as proof of investment, they receive a token. This serves as proof and is stored in digital form. In addition, it can be sent and traded, which means that the flexibility and decision-making ability remain with a user himself.
These tokens can then be traded on various exchanges. That is, investors benefit from the token’s price increase. In most cases, these are utility tokens that are associated with a specific service or function. The more popular and functional this token becomes, the higher the demand, and thus the price. A token is saved via a wallet. It stores the user’s private key and thus access to the blockchain.
Advantages of an ICO:
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- Easy implementation;
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- Low cost;
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- Little time spent on development.
Disadvantages of an ICO:
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- Partly bad image;
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- Less range;
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- Vulnerable to criminal activity.
An Initial Coin Offering (ICO) is therefore the best solution for private providers and small businesses. The implementation is fairly simple & inexpensive, and no previous knowledge is required. The ERC-20 standard also provides an already established form that enables different tokens according to the same criteria.
Security Token Offering (STO)
The most popular tokens are security tokens. This is a new form of tokenization which, unlike ordinary utility tokens, reflects a real value. These can be different analog assets, which are represented in the form of a digital token. STO has a much better reputation than ICO as it’s considered securities. It’s still a very new form of investment, which most experts consider to be very promising.
The blockchain offers great potential in interaction with traditional investment. Among other things, construction projects can be realized via crowdfunding, and the rental income can be paid out to a token holder as a percentage. Securities and stocks, bonds, raw materials, and precious metals can also be created as security tokens.
Many exchanges have already specialized in trading security tokens and designed a business model on their basis. This is a good indicator of the success of this method which should have a significant impact on the creation of new tokens.
Nexo provides an example of a successful security token. This is a recognized financial service provider that enables the issuing of instant loans using cryptocurrencies. The company’s own Nexo token serves as a security token and allows investors to share in the company’s profits. The dividend is paid to all holders of the token at regular intervals.
Advantages of an STO:
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- High security due to regulation;
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- For serious projects only;
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- Great potential and growing market;
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- Classic investment objects in digital form;
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- Good reputation.
Disadvantages of an STO:
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- Requires a lot of effort and costs;
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- Restricted freedom of action due to regulation;
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- Basic knowledge and business partners necessary.
An STO is therefore particularly suitable for financial service providers who can meet strict requirements. Moreover, an STO is associated with higher costs and expenses, but a great potential of security tokens offers great opportunities for creating new markets.
Initial Exchange Offering (IEO)
If you want to publish your own token, you can also do this via an exchange. This form is becoming increasingly popular and contributes to a presentation of new tokens. The exchange does some kind of research, as these generally list only serious projects.
The Binance exchange, for example, regularly lists new tokens. Here users can vote for tokens as well as participate. The projects selected there have a good chance of increasing their value.
Advantages of an IEO:
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- Many potential buyers on exchanges;
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- Exchanges usually list only serious projects;
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- Good reputation.
Disadvantages of an IEO:
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- High costs for providers;
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- Exchanges aren’t decentralized;
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- Vulnerability to insider dealing.
If you’re about to offer your token for sale on a stock exchange, you can count on an existing customer base. However, this form of token issuing is also associated with higher costs, which could be reflected in a token’s price. An image of a stock exchange also plays a big role.
Which type of crowdfunding do you prefer? Just share your opinion in the comments!
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