ICOs popularity has tanked — startups raise 97 per cent less money, investors no longer trust blockchain projects. Most ICO projects were closed without releasing any product. Another problem also made investors look at ICO with doubt — the US Securities and Exchange Commission (SEC) classifies most tokens as securities — many ICOs were banned for violations of the law.
Despite the obvious decline in the market, it’s too early to speculate on its death. The market for attracting investments through crypto is in its infancy, and future transformations are possible. ICO has several alternatives, each of which has its pros and cons.
Initial exchange offer (IEO)
Initial exchange offer (IEO) is increased investor security, in this way, a cryptocurrency exchange participates in the distribution of tokens. Or Initial Exchange Offering, means a project gets listed on an exchange directly without going through an ICO. We see more of these types of token issuing in countries where ICOs are restricted. The project does not run an ICO and does not launch a fundraising platform, but undergoes a thorough financial and legal review — Due Diligence and receives a listing on the exchange platform. The exchange is interested in adding promising projects, the increased interest of users in which is able to increase the volume of trading, and, accordingly, the direct income of the exchange — the trading commission.
Another characteristic feature of IEO is the rejection of “gas” competition. When buying tokens during the ICO, investors inflate commissions (gas) to be the first buyers and earn more. When working through the exchange, this will not work. This method is also beneficial for the project itself, which, thanks to the listing, gets a ready-made user base – cryptocurrency exchange clients.
However, IEO has two drawbacks – investor discrimination based on geography and the risk of hacker attacks. To participate in the initial exchange offer, an investor must complete the registration and verification procedure (KYC). The requirement can block access to tokens to residents of countries in which the operation of a particular exchange is limited.
Initial Futures Offering (IFO)
The Initial Futures Offering (IFO) is the latest method for crypto companies and investors to come together according to already known concepts such as ICO and IEO. Although IFO in some sources is called a serious alternative to ICOs, the community does not really view it this way. According to the owner of the BTC.Top mining pool, Jiang Zhuoer, this method of attracting financing is more like a scam.
In China, the developers decided that this is a great opportunity to evade the ban on ICOs, but IFO has a huge drawback – the possibility of hidden additional issue of tokens. To conduct such a coin placement, it is enough to clone a cryptocurrency, for this, you can copy the Bitcoin blockchain, come up with a new name and rebrand. In less than last year, over 40 forks of the main cryptocurrency happened, they receive funding from inexperienced investors using a big name.
As a result, tokens do not pass the verification of the regulatory body, cryptocurrency exchange or other third-party organization. They do not receive regulatory approval, investor rights remain unprotected, funds are not secured.
Initial Airdrop Offering (IAO)
Initial Airdrop Offering is similar to IFO in some ways, but are more flexible in the way they distributed the initial coins. Holders of a specific coin, such as BTC or ETH, receive new project coins for free. Often, within the framework of Airdrop, participants are obligated to perform elementary actions — to join a channel in Telegram or fill out data for feedback.
Organizers strive to create a hype effect. This is a way to attract early investors through the offer of free cryptocurrency in exchange for the decision to become a user of the project. Using this tool, the project can pursue the technical goal of token distribution and achieve less centralization of the token.
Airdrop is increasingly found in decentralized networks. This mechanism increases trading volumes in the cryptocurrency ecosystem — users receive free tokens and begin to look for ways to implement them.
This method is not a sign of compliance with the requirements of the regulator, cryptocurrency exchange or other regulatory body and does not provide investors with any additional rights. That is, as, in the case of IFO, the problem of security and reliability of investments remains unresolved.
Security Token Offering (STO)
STO stands for security token offering. Similar to an initial coin offering (ICO), 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.
The main reason for the end of the ICO era was the insecurity of investor rights, high-risk investment and increasing pressure from regulators. Only two alternatives solve these problems — IEO and STO.
STO is the initial offer of security tokens, which are tokenized stocks and a real investment tool. Owning them gives the investor advantages, for example, the right to dividends or a share of the company’s profits. Such coins must be secured, for example, with startup assets, and this must be legally confirmed before the start of sales.
The STO project meets all SEC requirements — investor money is protected by law. In the event of a dispute, a user can file a complaint with the appropriate authority, because now, the token falls under the legislation on securities. The legal framework of a startup, government control, and accessibility for institutional investors are factors in user confidence in the viability and investment potential of the company.
Disadvantages relate to project costs and granting the right to invest. Legal support of an STO project, issuing a security token and developing its functionality will cost a much larger amount than with an ICO. Only qualified investors can take part. They should have impressive private capital or be highly active in the financial market for a specified period. For example, in Russia, he must complete at least 10 transactions for a total amount of 300 thousand rubles over the past year, and in the United States – to have income from 200 thousand dollars for each of the last two years.
Security tokens are considered by analysts as a tool to return the popularity of the digital market. This is probably the reason why the number of STO projects is growing in the world: according to statistics from Autonomous Research, in 2017, there were 2 such proposals, in 2018 — 25, and, in 2019, no less than 87 are forecasted.