Companies that wish to develop cryptocurrencies have to overcome a crucial hurdle in their path to success, which is fundraising. There are several methods of attracting investments in the crypto world, and most of them resemble real-world IPOs. STOs and ICOs are the most popular ones, and so far, the most accessible for new projects. […]
Companies that wish to develop cryptocurrencies have to overcome a crucial hurdle in their path to success, which is fundraising. There are several methods of attracting investments in the crypto world, and most of them resemble real-world IPOs. STOs and ICOs are the most popular ones, and so far, the most accessible for new projects.
Today, we take a closer look at STOs, ICOs, and IPOs as we try to find out what the best fundraising method is. Stick with us, and discover how successful they apply in real-life projects in one of the most crypto-embracing economies in the world, Malta.
What are IPOs?
An Initial Public Offering (IPO) is the practice through which a private company puts some or all of its stocks up for public sale. It is an age-old strategy for companies to increase their capital by becoming a public, stock market-listed entity.
In return for their contribution, shareholders get to have a stake in the company. Also, depending on the number of stakes that they hold, they can even have a say in the way the corporation runs.
In the European Union, under present legislation, IPOs are passportable across all EU state members.
Benefits of IPOs
- The company gets access to attract equity from external investors
- Potential increase in liquidity through a secondary listing
- The company can use stocks as a means of payment
- Increased brand awareness
- Improved public image
Downsides of IPOs
- Stricter regulations and disclosures
- Market pressure
- The initial owners risk losing control over the company
- Initial Public Offerings are very expensive to organize
What are ICOs?
An Initial Coin Offering (ICO) is the IPO-equivalent, fundraising method for a company that deals in cryptocurrency, and for which most of its growth takes place on a blockchain.
Startups often use ICOs to garner capital for projects that are still in their early development stages. They begin by publishing a whitepaper in which they offer a detailed presentation of how the project will evolve.
The company then emits tokens to investors in exchange for funds that may be in the form of fiat money or other cryptocurrencies. Once the project is up and running on the blockchain, the token holders can use their coins to make further investments or trade them on exchanges.
Benefits of ICOs
- Startups can raise funds and develop projects quickly
- ICOs are still unregulated in many jurisdictions, so the fundraising process is faster
- Developers can get an early insight into the market that they wish to enter
- Easy and cost-effective investments for cryptocurrency enthusiasts
Downsides of ICOs
- The absence of legislation gives ICOs low credibility
- Susceptible to fraud, hacks, and scams
- The funds are subject to intense volatility
- The tokens do not represent equity
What are STOs?
A Security Token Offering (STO) is a fundraising method that combines some of the benefits of IPOs with the advantages of ICOs while having very few downsides for both of them.
Through an STO, a company issues stocks, bonds, or funds in the form of tokens on a blockchain. This practice of raising funds is regulated by traditional legislation in the European Union. Similar to IPOs, STOs are passportable across the EU member states and the members of the EEA.
Benefits of STOs
- Because they take place under transparent regulations, STOs are more credible than ICOs
- More cost-effective and quicker to process than ICOs
- They give company owners more control and flexibility
- Improved market efficiency due to low issuance costs
- Easy and quick enhancement of asset liquidity
Downsides of STOs
- STO tokens are generally more expensive than ICO tokens
- Complex compliance limitations for investors
- Security tokens can only be transferred via licensed platforms
How Malta regulates ICOs and STOs
Malta has one of the most progressive approaches when it comes to cryptocurrency. The small Mediterranean island-state became the first country in the world to regulate cryptocurrency use in late 2018.
Also known as the Blockchain Island, Malta aims to become the global capital of cryptocurrency by creating a regulatory framework for the use of digital assets. Some of the acts from the new legislation issued by the Malta Digital Innovation Authority (MDIA) include:
As per the VFAA, Malta regulated a form of ICO, also known as an Initial Virtual Financial Asset Offering (IVFAO), which states the conditions under which companies can practice this fundraising method in the country.
The country’s single regulator of financial services, the Malta Financial Services Authority (MFSA) is also looking into safe ways of legalizing STOs within its jurisdiction.
How does Malta’s IVFAO work?
When a company wants to launch in IVFAO in Malta, it has to abide by the MDIA legislation, which will appoint a group of experts to supervise the project. The group generally consists of:
- A VFA agent
- An Auditor
- A Custodian
- A Systems Auditor
- A Money Laundering Reporting Officer
Out of all the MDIA experts, the VFA agent will follow the development of the IVFAO from start to finish. This person is also the last one to greenlight the project’s whitepaper after ensuring its compliance with the regulations for virtual financial assets.
Issuing an STO in Malta
While the MFSA has not fully regulated STOs yet, a company can still issue a Security Token Offering in Malta, if it meets the following requirements:
- Put the token through the Financial Instruments Test to verify if it is classifiable as a security
- Prove the financial soundness of the company
- Prove that the board of directors has a good understanding of the industry
- Show transparency in regards to the EU legislation for financial assets and securities
The process of issuing an STO in Malta is somewhat arduous and time-consuming, and it may remain that way until the MFSA regulates STOs in the same manner as it did for the IVFAOs.
The Bottom Line – Which one is better between IPOs, ICOs, and STOs?
For a startup that wants to build a project on a blockchain, an IPO is out of the question since it most probably lacks the necessary funds and shares to organize it.
On the other hand, ICOs have made the news in recent years for being vulnerable to scams and hack attacks. Most entry-level projects have abandoned this method for attracting investors, and prefer to opt for STOs. However, if a company chooses to issue an ICO in Malta under the IVFAO formula, it benefits from the protection of a regulatory framework.
All in all, the best fundraising method for any given company is the one that best suits its interests. A startup must find a solution that provides most of the benefits of IPOs, ICOs, and STOs, and the smallest risks they bring.