IPO and STO are identical in their objective and effect. Both aim to raise capital in return for a security. The security can be an equity, preferred stock, bond or any other instrument that gives rights on income and claims on the assets of the issuer in the form of debt or liquidation equity.
If security token offerings are also public offerings under regulations, then what is the real difference? Can there be advantages for carrying out an STO rather than an IPO?
In terms of parties involved, structuring, technology and therefore costs IPO and STO differ tremendously. IPOs involve a lot of intermediaries, agents performing either core or auxiliary roles. All these need to be remunerated and demand a piece of the cake. What is more important though is that the core service providers in an IPO act as gate-keepers to an elite club and their subjective judgement can make or break a business offering. That is why IPOs are not suitable to small and medium sized companies but only serve as an exit option when scale and size has been achieved and winners have in the race have been determined.
The IPO is a centuries old practice with a lot of baggage and redundant elements which bear no touch to modern reality. This baggage is heavy and the time has come for its evolution. STOs bring IPOs to the 21st century with a number of benefits for both investors and business owners. As a result many influential players agree that STOs will disrupt the IPO markets and even replace them completely.
Both methods of public fundraising are based on financial instruments. In an IPO the investor buys stocks that represent equity in a company and becomes the owner of a percentage of it, with dividends and liquidation equity rights. In a STO the investor buys a token that also represent equity in a company, having rights to dividends, liquidation equity and voting rights. In an STO however there are countless variations since any asset or business can be tokenized, e.g. bonds which give rise to interest and repayment of principal after some time.
So what is the difference? Essentially STO’s eliminate intermediaries, save costs and lower the size threshold to include SME and start-ups.
STO benefits over IPO
Costs — It is estimated that an STO campaign costs 40% less than an IPO. Mostly due to the fact that it is carried out in digital form on a decentralized blockchain network. Smart Contracts facilitates regulatory compliance allowing more effective sales and exits by eliminating intermediary fees. All actions associated with a token are programmed into it making possible a range of automatic activities and steps.
Lower barrier of entry — Just like IPOs, STOs are legally bound, and therefore the collaborations of lawyers and advisors are also necessary. This costs money. Nevertheless, the charges are much less than paying the investment banks along with brokers. Plus, STOs supply much more direct and transparent way to access a broader investor base, minimizing brokerage fees as compared to conventional investment banks.
Global — IPOs are usually performed within the jurisdictions in which the business conduct operations, shutting out foreign investors. With STOs, this issue can be resolved by investors conceding to be treated as local persons or entities under the jurisdiction of issuance of the token. In the case of EDSX, an EU individual will have to acknowledge and provide consent to be treated as a local Swiss resident as EDSX is based in Switzerland. Investors also need to have an account (essentially undergone KYC) on the STO platform to take part in it. Therefore, STOs are not limited to a specific area (unless if that is the intention). This trait alone brings incredible advantage in boosting the investor pool.
Novel — Cryptocurrencies and also ICOs swept the financial markets as no one ever anticipated, except for the hardcore followers and crypto believers. Get rich quick promises and the appeal of how easy it was getting involved produced an enormous community of individuals that have been for the first time introduced to investing. Unfortunately, the majority of people involved in ICOs lost their money due to its unregulated nature. This investor group is now interested in safer and better investments. The investor profile can be somewhat different between an STO investor and an ICO investor, though the curiosity in STOs is already significant, and provides excellent reception amongst these brand new investors. Particularly the younger generations are happily adopting token investments rather than opening classic investment accounts with brokers. These individuals do not operate on traditional stock markets and probably never will. Institutional investors that invest in the traditional stock markets although going to continue to do so will also start purchasing and holding security tokens in their portfolios.
Continuous access - 24/7/365 — Trading in the security token market is 24/7/365 with 99.99 % uptime. Because Security Tokens and STOs Tokens are decentralized and automated the majority of administrative responsibilities which are done by executive, stakeholders, panel members, financial analysts, and brokers in the analogous realm of the human-run public business are built in code. Issuance, reporting, settlement, clearance, underwriting, exchange, registry, and compliance do not involve human intervention in a security token. Hence the convenience to acquire or dispose of them around the clock.
STOs will disrupt traditional IPOs
Traditional IPOs feature a track record of high exclusivity, only available to a tiny, pre-selected group of investors. With STOs the objective is different. The need for going public is rather served by an inclusive offering that in turn provides substantial financial savings. The reduced costs are not the sole advantages of STOs. Since STOs are available to a much broader audience, beyond the exclusive big-player club, greater number of investor access, better returns and prices are obtained and deeper liquidity is made available.
The macro and micro Tokenomics is still in its nascence. The STOs is the next logical step after the ICO frenzy, and it is expected to continue to evolve. 2020 was considered to be the year of the STO until the outbreak of COVID. After the pandemic crisis is resolved the entire game might change again with a new innovation that we might not have even dreamed of. It is thrilling to have such a brand new, volatile, and innovative industry that leaves the financial world at the edge of their seat waiting to witness what happens next.