STO verses ICO

The biggest difference between STOs and ICOs is that STOs issue a token that is considered to be a security, whereas ICOs issue a token (or coin) that can be a utility, commodity (or currency), or a security. This could result in many differences in the offering processes.

Regulatory risk: SEC may view an ICO as an issuance of a security and take actions against fundraisers, including canceling ICOs and returning raised funds to the original investors. STOs, if done properly and compliant to security laws, will not have such a risk. The following are examples of the reasons:

• Requirements on AML and KYC: STOs have to follow the AML and KYC laws or regulations and ICOs do not have such obligations.
• Requirements on securities laws: STO issued tokens need to follow the relevant securities laws and ICO issued tokens do not need to follow.
• Intermediaries involvement: The ICO process does not require services provided by bankers, lawyers, or any other intermediaries. The STO process involves these intermediaries. Some recent studies show that the involvement of intermediaries and middleman entities help to improve and create efficiencies.
• Ideology: The STO fundraising approach moved away from the decentralized ideology (for example, still having intermediary involvement) that is a core idea in blockchain industry, whereas ICOs follow the idea of decentralization.
• Secondary trading markets: ICOs issued coins are traded at cryptocurrency exchanges that do not need to obtain licenses, whereas STO issued tokens have to trade at licensed exchanges via registered broker-dealers at higher costs because of the required supervision and employment of licensed staff.
• Governance and control: An STO process provides a governance and control framework that makes scams and fraud much less likely, whereas an ICO lacks sufficient control, which can lead to many scams.
• Documentation: STOs need to comply with applicable securities laws since it issues a security, whereas ICOs do not need to comply with applicable securities laws and instead just need to provide (at most) a white paper.
• Cost/duration: STOs are more expensive and take a longer time to complete the process of registration with the securities regulatory authority and comply with the securities and other regulatory rules for issuing a security, whereas ICOs do not need to follow such processes. This leads to lower costs as well as a shorter duration to complete an ICO.

Security token issuers are subject to other constraints, which we will discuss later. These limitations are time-consuming, intrusive, and expensive.