How Blockchain is transfiguring crowdfunding: ICOs, STOs, and IEOs
Smart lands, a regulated blockchain-based crowdfunding company is the first of its kind in the UK. It helps asset owners tokenize their real estate (improving liquidity) and investors to enjoy fractional ownership of property (more investment opportunities).
In another instance, Kik, a Canada-based messaging app, launched a crowdfunding campaign to back a possible court battle with the U.S SEC regarding its 2017 ICO. They are looking to raise $5 million in the form of crypto (BTC, ETH, XRP, and a few others).
The above are only two of the instances in which blockchain-based crowdfunding has been implemented. From the numerous blockchain-based crowdfunding projects conducted, 31 have collected average funding of over $177 million.
Long gone are the days when entrepreneurs, in order to raise funds for their business, had to know a lot of potential investors and possess good networking skills. Today, there is a multitude of alternate fundraising mediums, one of which is crowdfunding.
Crowdfunding earned its fame with the various websites that allowed entrepreneurs or regular individuals to raise funds for all kinds of needs – from starting a business to financing an NGO.
As time passed, crowdfunding continued to evolve and still does. The latest development, crowdfunding with blockchain technology, has created more transparency and accountability in the system.
Typical crowdfunding faced issues such as swindling of investors’ money, high transactional fees, middlemen charges, and more.
How did blockchain solve these issues?
- Smart contracts
These contracts provide a means to keep the funds in escrow. It negates the possibility of companies misusing capital for purposes other than what was originally stated. It also ensures that funds are transferred back to the investor if the company is incapable of delivering their promises.
The entire sum collected in a traditional crowdfunding event does not reach the company. Mediators take a percentage of the amount raised, often a significant one. Blockchain erases intermediaries, thereby allowing the fundraising company to use the whole amount for their operations.
The above points are only two of the reasons why blockchain-based crowdfunding is making waves in the business universe. There are many layers to blockchain technology that is yet to be discovered and incorporated.
Crowdfunding is just one aspect and can be performed in different ways depending on a company’s requirements.
What are the various crowdfunding platforms?
- Initial Coin Offering (ICO)
Blockchain crowdfunding started off with the ICO, a platform where businesses could raise funds from the public, without central regulations. It offered digital tokens in exchange for cryptocurrencies.
The first ICO was launched in 2013, but it was only in 2017 that the crowdfunding mechanism started attracting attention. From all the ICO projects, a total of 875 raised $6.2 billion in 2017.
The ICO has of late lost its initial appeal after a very vigorous two years. Despite this, it still works for a multitude of startups as it is efficient and unregulated (less expensive).
- Security Token Offering (STO)
As the name suggests, a Security Token Offering is a crowdfunding event in which companies offer the public their digital tokens backed by external assets. After the ICOs went downhill due to the overflow of scams, STOs made its entry. An STO is neither an IPO nor an ICO, but rather an amalgamation of the two.
Regulated by the councils in charge, a Security Token Offering encourages accredited investors and bona fide companies to take part. A company can raise funds through three types of security tokens – Equity Tokens (represent the value of shares), Debt Tokens (represent liabilities and outstanding debts), and Real Assets Tokens (represent ownership to an asset).
In 2019, more than $500,000,000 has already been invested in the STO industry, regardless of the fact that it is a very recent entrant. STOs only expect positive growth and are transmuting finance on a large scale.
- Initial Exchange Offering (IEO)
IEO or Initial Exchange Offering, the most recent entry, is quite different from its predecessors. Unlike the ICO and the STO, an IEO is conducted by a cryptocurrency exchange, typically an established one.
The onus is on the exchange to issue the digital tokens and market them to their user base. The exchange protects the investors by screening the companies that approach them. On the other hand, issuers are relieved of the burden of performing KYC/AML procedures.
BitTorrent, Fetch.AI, and VeriBlock are a few examples of IEOs gone right. Reaching their hard caps in a matter of minutes, they are proof of IEO’s potency.
Crowdfunding has opened up avenues for companies looking to raise funds and simultaneously encourages retail and institutional investors alike to contribute to the cause. Blockchain technology has once again proved to be the backbone of a major portion of the advances towards a systematic and higher standard of business.