Venture Capital financing in the cryptocurrency world has undergone tremendous changes in the past few years. From the traditional Initial Coin Offerings (ICOs) to Security Token Offerings (STOs) to Initial Exchange Offerings (IEOs) and now it seems STEOs are on the way.
STEOs are a new model of fundraising that is coming to the crypto industry which combines the benefits STOs+ IEOs into a single platform.
The rising popularity of technology in finance and blockchain startups has led to a constant change in the ways of raising money, either from the general public or a small pool of high-profile investors.
The significant success experienced by Ethereum and other platforms is proof enough that companies and projects can survive and even thrive in the absence of venture capital firms. Nonetheless, the crypto landscape is evolving rapidly.
How Fundraising Within The Crypto Industry Has Evolved Over The Years
Initial Coin Offerings (ICOs)
The Initial Coin Offering market began in 2013 and picked up the next year following the initiation of Ethereum Blockchain and reached its peak towards the end of 2017 when major digital currencies such as Bitcoin and Ethereum eventually filled the media headlines.
Before ICOs, mainly were hedge funds and traditional venture capital funds, were privileged to be part of the early-stage investing in new projects, called the Initial Public Offerings (IPOs).
The ICOs then created a new path, where all investors (accredited or not) could partake in the early-stage crowdfunding. This process was fast, attainable, and lucrative. To show you how lucrative these were, below is a picture showing the ROI of three projects that had their ICOs in 2017.
Nonetheless, ICOs had its disadvantages. The main challenge was a lack of regulatory oversight. This led to a market full of over-promising results, Ponzi-schemes, poor reporting, investor manipulation, and other forms of fraudulent ICOs.
However, the get-rich-quick mentality was still in the mind of investors, and they overlooked these traps since it was too tempting. Nevertheless, most ICOs that stole money from investors have not been prosecuted, and the money they took is yet to be recovered.
Security Token Offering (STOs)
As the fraudulent activities in the ICO market quickly attracted the attention of the US Securities and Exchange Commission (SEC), blockchain startups realized that they had no choice but to comply with the regulatory requirements of the SEC, and began offering tokens based on some underlying asset.
This led to the birth of STOs. The popularity of STOs began to increase in the Q1 of 2018, and peaked in November the same year, according to data from Google Trends.
While STOs came with extra costs and legal complexities, they increased investor protection and a higher degree of transparency.
According to the founder of CrowdfundX, Darren Marble, “Investors purchasing STOs will know what their interest is in the company at any given time. No more vague contracts or lack of regulations. They are an excellent option for companies looking to raise capital from individuals and institutional investors in a way that’s not fully compliant with securities laws and allows for a highly tailored form of investment vehicle. For startups seeking capital, STOs are a viable and attractive option.”
Initial Exchange Offerings (IEOs)
This is a new breed of fundraising that took off at the beginning of this year. Binance was the first to launch its own IEO platform, the Binance launchpad which has been an enormous success so far managing to host 6 projects since the start of the year. The success of the platform inspired other exchanges to follow suit with launchpads of their own to ensure they don’t miss out on the benefits that IEOs bring, including injecting liquidity. So far, over 27 exchanges are hosting IEOs including the likes of OKEx, Bittrex, and Huobi.
Tokens sold through an IEO are immediately listed on that crypto exchange. This is a distinct difference to ICOs, where tokens take longer or never to be listed on the exchange.
Additionally, IEOs are safer and more credible, since investors purchase crypto tokens directly from a mainstream crypto exchange. Moreover, IEOs require investors to complete KYC verifications and other security checks, which provides a streamlined experience. However, investors who are already registered with the exchanges are not required to comply with any KYC or AML procedures.
The Next Wave Of Fundraising Within The Crypto Space; STEOs
A few years ago, when ICOs came around, everyone thought they were the perfect solution to fundraising within the crypto space; however, their many drawbacks led to the birth of STOs and now IEOs.
One thing that stands out within the crypto space is how fast things change, and it seems change is on the horizon again as a new form of fundraising is on the way. So far, we have evidence of this as a few platforms are already working on STEOs, a combination of STOs + IEOs. The ultimate goal is for these new platforms will act as the benchmark for crowdfunding projects within the industry over the next few years.
Just imagine a platform that will be able to combine the benefits of STOs like tokens that have intrinsic value. Then there is transparency which allows investors to access relevant information on the project that is making the offering. And regulatory compliance which is vital if the tokens are to be listed in various markets like the United States.
Combine the above benefits with those offered by IEOs like getting tokens listed on exchanges immediately, availability of legit projects since exchanges carry out due diligence and security since the exchanges carry out KYC and AML processes and you see why STEOs will be the benchmark for fundraising over the next few years as the industry matures.
Also, it’s important to note that the various forms of fundraising have been lucrative for investors, at least at the beginning one only has to look at a project like IOTA which offered its ICO back in 2015 and now has a ROI (return on investment) of +424,084%.
Blockchain Capital, which offered its STO in 2018 has seen an ROI of +161%, which is not that bad compared to BitTorrent’s ROI of +400% for its IEO held at the beginning of this year.
Since we can’t go back to the time when some of these projects offered their tokens through various modes of fundraising, interested investors can still benefit from the upcoming STEOs and, it would be wise for everyone within the industry to pay attention to their coming otherwise they stand to miss out.
Basil has three years of freelance experience writing on disruptive technologies. He focuses on breaking news and education pieces; helping to spread the gospel of Blockchain. He hopes to have his own blockchain company one day; helping the world through its innovative ledger technology.