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HomeFinanceSTOs vs. ICOs: Everything You Need to Know About Crypto Fundraising

STOs vs. ICOs: Everything You Need to Know About Crypto Fundraising


In their infancy, blockchain and crypto industry startups usually share a primary concern: raising funds necessary to build and scale a successful business.

Initial Coin Offerings (or ICOs) have gained considerable attention within the sector over the past several years. ICOs offer startups crowdfunding solutions to one of their most pressing problems.

They make it easier to find the money required to get a business off the ground and running.

There’s a lack of proper regulation concerning these crowdfunding efforts in the financial services sector, though. And that’s led fraudsters to an easy means of picking up quick cash.

A newer crowdfunding solution solves some of these issues. Security Token Offerings (or STOs) are rising in popularity. They’re an ideal alternative to the traditional ICO model.

Both ICOs and STOs offer a couple of advantages– they both also come with drawbacks. The ideal selection for any startup depends on various factors, but getting started with the decision-making process is much simpler with some basic knowledge.

Why is cryptocurrency so powerful for nonprofits?

Cryptocurrency is something of a saving grace for nonprofits.

The nonprofit sector has undergone rapid growth in recent years, with over 1 billion people worldwide donating their time or money to charitable organizations annually, according to the Giving USA Foundation.

Cryptocurrencies are being accepted more and more by nonprofits as donations become more convenient thanks to crypto payment processors who have made it easier for donors, ultimately benefiting NGOs through cryptocurrency donations that can be transferred seamlessly without taking up significant resources.

Initial Coin Offerings (ICOs)

ICOs are a method of fundraising. Startups who want to provide new products or services usually look for external investors to assist with funding projects.

This is generally achieved through various marketing campaigns and outreach efforts.

When an investor chooses to hand over some of their cash to a startup, they’ll receive cryptocurrency tokens in exchange for their donation. These tokens are unique to the individual ICO being run.

When investors choose to fund projects, they hope that the tokens they receive will increase in value. Their end goal is to trade those tokens later on to make money.

When are ICOs Used?

Often, startups look into ICOs when they feel like having a reason to avoid the regulatory procedures attached to traditional fundraising efforts.

The rules and regulations around giving and receiving funds are usually strict. This can translate to the time-consuming, expensive effort on the part of a new business.

Many startups don’t have the cash or manpower to make traditional fundraising work. They turn to an ICO instead.

ICOs are also incredibly simple to launch; they offer a company nearly unprecedented levels of freedom, and they make moving money easy. Numerous platforms provide hosting services for ICO launches.

Pros and cons of ICOs

Pros:

  • ICOs create a positive network effect
  • No entry barrier – this means that raising funds can be easier
  • Team members manage funds utilizing their own blockchains – tokens can be distributed accordingly
  • Marketing is solely digital – digital marketing is generally cheaper than traditional advertising (social media, company websites, and other online avenues are free and easy to use)
  • In the event crypto manages to achieve mainstream popularity, investors have more liquidity

Cons:

  • ICOs are not regulated – investors lack legal alternatives if funds are lost or compromised
  • From an investor viewpoint, there’s a risk that a company could take funds and run

Security Token Offerings (STOs)

Understanding how Security Token Offerings (STOs) work can be tricky without a clear understanding of what a security is.

A security is a type of money that you can trade. It might represent an ownership position in publicly-traded corporations, the debt owed to you by a government or corporation, or your right to ownership as represented by an option.

Essentially, securities afford investors the ability to own a portion of a company without actually taking it.

Startups concerned about security can utilize STOs to acquire the funds they need to hit the ground running, and, in return, investors can gain access to benefits like interest rates, dividends, and profits.

STOs are a more secure means to fundraise through cryptocurrency. A Token must fulfill specific requirements set forth by the Howey test to be officially considered a security. These requirements are:

  1. The Security Token must involve an investment of money
  2. There is an expectation of profit from said investment
  3. The investment is in a common enterprise
  4. The profits are derived from a third-party or promoter

Because STOs are always backed by a tangible asset, they help ensure that the exchange of funds is above-board. Investors are offered a greater sense of security (and fraudulent business and investors are less likely to be involved) with an STO than an ICO.

If a startup uses an STO to raise funds, it benefits from the fact that STOs must operate under the federal government’s strict securities regulations.

While this often requires more work and funds to create a transparent campaign that plays by the rules, the benefits tend to outweigh the costs considerably.

When a business registers its STO with the SEC, it’s essential to have the following information ready to hand over:

  • Descriptions of the company’s property
  • Descriptions of the company’s business purpose
  • Descriptions of the security being offered
  • Descriptions of the business’ management structure
  • Company financial statements (must be confirmed by an independent accountant)

The pros and cons of STOs

Pros:

  • STOs are registered with the Securities and Exchange Commission (SEC) – the SEC only allows reasonable, viable, safe projects to continue
  • Market experts have confidence in STOs
  • Security tokens are expected to be traded on the Alternative Trading System – tokens should be traded with broker-dealers (this means FINRA will supervise transactions)

Cons:

  • The barrier of entry – cutting through the red tape necessary to launch an STO can be costly and time-consuming, and companies must apply for an exemption to seek investment
  • Only accredited investors can fund

What role do venture capital firms (or other financial institutions) play?

venture capital firms

Enterprises that need to raise money for an investment, infrastructure project, merger, or acquisition issue securities in return for cash. It can happen at the ground level- with individual investors-or through large financial institutions.

Investors of cryptocurrency assets (e.g., Bitcoin, Ethereum, XRP) are end-users who may also invest in crypto STOs as a means to diversify their portfolios and earn a substantial return on investment.

Fundraisers can trade cryptocurrency assets for crypto security tokens that represent an enterprise’s partial ownership or debt obligations. This is an innovative way to expand crypto-asset participation in ICOs.

The crypto fundraising market is growing exponentially, and crypto security tokens are just one class of cryptocurrency assets that have entered the marketplace.

Venture capitalists (VCs) invest in crypto STOs by purchasing crypto security tokens with funds raised from limited partners or portfolio companies.

VCs can take crypto security tokens acquired through cryptocurrency fundraising and sell them at a profit on crypto exchanges. This helps support crypto exchanges, trading platforms, index funds, brokers, and crypto wallet companies.

Crypto crowdfunding will expand the pool of crypto investors and increase demand for additional cryptocurrency assets.

What about retail investors?

Retail investors that invest crypto into crypto STOs are end-users who also invest in crypto as a means to diversify their portfolios and earn a significant return on investments.

The cryptocurrency fundraising market is growing exponentially, and crypto security tokens are just one class of cryptocurrency assets that have entered the marketplace.

Venture capitalists (VCs) invest in crypto STOs by purchasing crypto security tokens with funds raised from limited partners or portfolio companies.

VCs can take crypto security tokens acquired through counter-crowdfunding and sell them at a profit on broker-dealer’s exchanges like Coinbase Pro.

This helps support the brokers and exchanges themselves and other relevant organizations like index funds, brokers who trade the securities token markets, or wallets that store crypto assets.

Why do organizations like Save the Children accept cryptocurrency donations?

Cryptocurrency donations are one way for crypto-aware donors to provide vital support while bypassing any banking or donation fees.

It’s an effective way of giving because crypto contributions come with the added benefits of borderless and decentralized transactions, making it easy to receive funds from anywhere in the world without banks getting involved.

Save the Children doesn’t miss out on corporate sponsorships like some nonprofits do, either by choice or because they don’t welcome crypto donations due to mistrust (think fake news).

Cryptocurrencies offer anonymity, which traditional fundraising efforts lack; thus, crypto donations through platforms like SavetheChildren.org can speed up this process and cultivate transparency within digital transfers of money between global collaborators.

SaveTheChilden.org accepts crypto donations of Ethereum (ETH), Bitcoin (BTC), Litecoin (LTC), and Dash (DASH). Crypto is the way to go in cryptocurrency fundraising, where factors like security and permanency are critical in transactions.

Is cryptocurrency donation tax-deductible?

This is a question where crypto enthusiasts and crypto skeptics clash, but crypto donations are not tax-deductible. The IRS classifies crypto as property (not currency), which means that crypto donors will see market prices included in their financial records.

Any income or losses from crypto projects must be documented on your taxes because cryptocurrencies count as assets (also known as crypto-assets).

Suppose you’re donating crypto to a 501(c)(3) charity. In that case, the company will need to convert it into dollars before they can use it or spend it, so you’ll lose out on any investment opportunities with cryptocurrency’s potential growth rate over time due to its high volatility levels relative to fiat currencies.

The crypto market is volatile, but crypto fundraising can be even riskier. The crypto world has seen crypto values skyrocket while also plunging to earth.

That’s why crypto donations are attractive to nonprofits – they’re essentially free money. But crypto users must do their due diligence on the charity before donating, so they know that their crypto will be used as intended.

Read reviews and investigate the company you’re supporting before handing over any crypto funds.

Do smart contracts play a role in cryptocurrency fundraising?

A smart contract is a piece of code that defines the logic needed to facilitate transactions in crypto.

In other words, smart contracts are self-executing agreements between two or more parties with clearly defined rules and penalties around them. Smart contracts can be used in crypto fundraising because they help automate processes, cut out intermediaries, and decrease overhead costs.

How do authorities help prevent money laundering with this type of fundraising?

crypto money laundering

Authorities can help crypto fundraising stay safe by backing crypto projects, safeguarding crypto wallets, and creating regulatory frameworks. Authorities try to maintain crypto’s transparency for charities but also its anonymity for crypto users.

The National Anti-Money Laundering Agency (NAMLA) protects organizations from illegal activity because it has advanced data mining techniques ahead of the curve for blockchain technology.

This helps keep crypto safe no matter what, whether you’re buying or donating with cryptocurrencies.

Other regulation authorities include the Securities and Exchange Commission (SEC), which regulates traditional Wall Street trading mechanisms like stocks, bonds, options contracts, and different types of derivatives trading – all things that show up on exchanges next to crypto transactions online.

You’ll want to pick an exchange or crypto wallet that has passed regulatory scrutiny. This means government officials have looked through the crypto platform thoroughly to ensure it’s safe for crypto users.

Regulatory authorities are also interested in crypto because they know crypto is a new fundraising trend, so they want to protect users from money laundering and other illegal activities that could take place with crypto transactions. The crypto market is snowballing, which means crypto fundraising has grown even faster.

Crypto can make crypto fundraising more accessible and efficient for crypto donors, charities, or crypto exchanges.

Crypto enthusiasts should be conscientious when participating in crypto fundraisers because it’s hard to tell what crypto projects are legitimate and which ones aren’t. It’s also hard to tell how crypto exchanges are dealing with money laundering.

Crypto fundraising is a trend that can help crypto users who want to donate or crypto charities looking for funding. Still, it’s also one that authorities are trying to keep an eye on because of the high levels of volatility and risk involved in cryptocurrency transactions.

It’s essential to carefully study and read crypto news and crypto prices to make sure you’re doing crypto fundraising safely.

The future of crypto fundraising is in the hands of crypto users, charities, and authorities looking for ways to protect both crypto users and crypto projects from illegal activity.

It’s possible that this new form of fundraising could be one of the most efficient and transparent fundraising methods for crypto charities and crypto projects out there.

Summary

An STO approach to raising funds will always be best served by those who prioritize security and governmental oversight.

The work that goes into complying with regulations (and keeping investors safe) can be a burden, but it’s usually worth it. Running an STO shows that a startup is willing to take whatever steps necessary to benefit and protect investors.

If time is not on a startup’s side or confident in its investors, an ICO can still be a great way to fundraise.

It’s essential to take extra measures to vet potential investors, and the company will likely need to spend a lot of time proving that its own business is trustworthy. Still, none of that means that an ICO can’t serve its intended purpose for a company.





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