During our sales meetings, we sometimes spend the first ten minutes explaining to our clients the differences between the ICOs and STOs. While it’s easy to differentiate ICOs from STOs, the main question that constantly comes up instead is how the STO differs from the IPO?
If security token offerings are regulated public offerings, then what’s the difference and is there any good reasons for doing an STO instead of an IPO? IPO as a financing model has been around for a long time — the first IPO was conducted 400 years ago, in 1602! Today, many industry insiders believe that STOs will disrupt the IPO markets. As always with such statements, it’s wise to research and make your own conclusion. Though we believe this will happen, we do not think it will happen as quickly as some people expect. As STOs and security tokens are regulated, providing any necessary infrastructure and services which are required for the market to function properly, are generally licensed activities. Licensing and compliance take time and capital. Hence, the barrier of entry is bigger, which makes everything slower, yet provides the much-needed certainty and quality, which has been clearly lacking in the ICO markets.
What advantages IPOs have?
As IPOs have been around for a long time, it means it’s the go-to option for established companies to raise capital. By established companies, we refer to companies that have a working product and viable economic results or at least supporting growth metrics (by growth we refer to IPOs that are generally done by unicorn startups which require capital to fuel their immense growth). Unicorn startups do not need new financing model, as they have plenty of interest from the VCs and the public. Yet, these are the companies and use cases that STO market needs in order to attract investors and capital. The incumbents of the financial markets, the institutional capital, won’t invest into STOs if the quality of the companies isn’t there. So, IPO has a certainty as a fundraising method (not saying that IPOs don’t fail) which is proven itself through times. Certainty is a big factor, especially if big money is on the line. Imagine a CFO pushing for an STO and failing. It’s likely that this person will lose the job. Now, imagine a CFO going for the traditional IPO route and failing. Most likely, the person won’t get fired (at least not for this decision), as he or she just did what everyone expected. People are risk-averse, hence such psychological factors have to be considered when it comes to faster adoption of security token offerings. Perhaps soon, as STOs push themselves to the podium, and we have more successful use cases, then this won’t be a problem anymore.
Currently, traditional stock markets have lots of liquidity. Security token exchanges are just launching, and it’s not clear yet whether these exchanges will build great products and attract enough liquidity to provide a viable secondary market for the tokens. And it’s not clear when it will happen. Our assumption is that there will be plenty of options, just like with traditional stock exchanges. Already today, traditional stock exchanges are building their capabilities to facilitate the security token trading. For example, several crypto exchanges (Binance, OKEX, etc) are working with the Malta Stock Exchange to jointly launch trading platforms for security tokens. You can find similar initiatives elsewhere in Europe, Asia and in the US. Australian Securities Exchange, London Stock Exchange, Templum, Open Finance and tZero are some of the notable samples. The biggest crypto exchanges reached heights no one ever thought they would. Same will happen to the security token exchanges. The only question is when.
Benefits of STOs?
Lower barrier of entry.
It may sound a bit controversial, as STOs are regulated offerings, just like IPOs. Meaning, the issuer has to comply with the legal framework of conducting public offerings, which in turn means including lawyers and advisors — just like with IPOs. This costs money. Yet, the fees are far less than paying the investment banks and brokers. Also, platforms such as TokenizEU have their worked-in legal structures of conducting the offerings. This helps to bring down the cost. Post-offering administration is way cheaper with STOs compared to IPOs. Plus, STOs should potentially provide a more direct and transparent access to the investor base and lower brokerage fees compared to traditional investment banks.
While unicorn startups won’t need a new model for financing, it doesn’t apply to most companies. And there are plenty of quality companies that wouldn’t do an ICO due to uncertainty, and neither would they do an IPO due to the complexity and the cost. STO has the potential to unlock liquidity for these companies, and bring a plethora of new investment opportunities for the seekers of a steady return.
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Comistar provides business, legal and tax support for e-residency companies. Our core focus is on e-commerce companies, blockchain industry and affiliate marketers. We’ve been operating for 5 years and have helped more than 300 companies to get started in Estonia.