One of the least expected fields in which blockchain made an impact is in the field of fundraising. Earlier, fundraising was a complicated and cumbersome process involving a lot of paperwork. Investing in start-ups was a privilege confined to a few and it was, by no means, democratic. There was also a geographic restriction when it comes to allowing investors – it meant that an investor from China or India can never think about investing in a start-up in the United States.
This not only hamper the progress of a start-up but also reduced the diversity in the investment portfolio, making it a puppet in the hands of the majority stakeholder even if someone has created it. Crowdfunding did seem like an option but it was far from being practical.
Blockchain answered the million dollar, or even the billion question of fundraising, especially for crypto projects. The immutable and universal nature of the blockchain has made it an amazing choice for companies to depend on it for investments. In essence, blockchain is nothing more than a decentralised digital ledger, and it also facilitates issue of tokens. Considering all these factors, blockchain based investment methods seem quite promising and are all poised to be the investment method of the future.
There are three major ways in which blockchain is used to raise investments – Initial Coin Offering or ICO, Security Token Offering or STO, & Initial Exchange Offering or IEO.
Let us look at all the three in detail:
Initial Coin Offering:
ICO as it is commonly abbreviated, is the most common method of crypto fundraising. In this method, the crypto project presents a white paper detailing the project and the avenues of profitability. The interested investors can purchase tokens for certain cost.
These tokens do not essentially represent shares or any other tangible values of ownership in the company. Instead, they entitle the token possessor to certain privileges like access to the product or access to the premium features, or even early access to the product even before it enters the market.
There are chances that certain exchanges might accept these tokens and convert them into coins. If they are converted into coins, they can be exchanged into any other crypto or fiat currency. However, this possibility is completely contingent upon the acceptance of the token by a reputed exchange.
ICOs do not impose any restrictions on the investors. It implies that even non-accredited investors can participate in the offering. As a flip side, it does not fall under the scrutiny of the Securities and Exchanges Commission (SEC). Since it does not fall under any legal framework, it has been marred by a lot of scams. These scams have not only tarnish the image of ICOs but have also sent back the progress of blockchain based investment platforms by a considerable distance. There was a growing need for unifying the regulatory framework along with the versatility of the blockchain.
Security Token Offering:
The presence of the word ‘security’ automatically brings in the regulatory powers of the SEC. The STO as it is commonly abbreviated is fine point of unification between the versatility of the block chain and the traditional values of credible and regulated investments.
Since the STO comes under the purview of the SEC, it is important that the investors need to be accredited. There would be certain equivalents of such regulatory bodies in other countries and it is quite natural that STOs fall into this regulatory framework.
STOs operate quite similar to the traditional stocks. Possessing a security token not only entitles the holder to certain privileges but also access tangible assets in the form of stocks or debts.
Security tokens can be traded for crypto or Fiat money. However, the acceptance of the token is decided by the exchange including its value and its position in the market. There might be instances when some exchanges might not accept the token. You do not have any other option but to sell your tokens only to the company that provided it.
While the issue of accountability was successfully addressed in STO, it still left the acceptance of the token unaddressed.
Initial Exchange Offering
In the comedy action flick Starsky and Hutch, the final punchline delivered by Snoop Dogg who did a cameo in the movie is “Why search for the start line when you can get to the finish?” This is precisely what happens with IEOs. Instead of relying on whether or not a token will be accepted, it would be better if the exchange itself issues a token telling that these tokens represent shares in this particular trip to project and at the same time, these tokens also have this value which can be exchanged for any crypto or Fiat currency.
That would be the holy grail of crypto investing, right? We will have to admit that people invest only because they want returns! The returns in the crypto world can only be affected by a crypto exchange. If the exchange itself can vouch for the credibility of a token, then investors can be assured that they can reap the benefits.
This seems like quite an easy process on paper but it is not as easy as it sounds. For a project to quickly get credible investors, it is essential that the project is listed in a reputed exchange. If an exchange has its own credibility to say they will have a meticulous process of scrutiny to ensure that their reputation is not scarred by listing any malicious projects. These exchanges are also bound to ask a hefty sum of money to get you your project listed.
No good things come without a cost and greater investments are not an exception to this golden rule. It will be quite evident that IEOs are more expensive than STOs and STOs are more expensive than ICOs. Anything said, it also goes in line with the dependability and credibility. For all you know, that might be a new avenue of investing into the projects that might even do away with the cost involved. After all, liquidity is also one of the most important aspects in investment right?
Blockchain app development companies are investing their time and effort in improvising and constantly streamlining the way in which crypto investments are sought. It will be surprising to know that all of this happened within a span of a decade. If the same place where to be followed, it is sure that a new form of crypto investment will soon hit the market!