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ICOs, IEOs and STOs: Token Sales as Innovative Formulas for Financing Start-Ups

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Financing Startups

Part of the book series: Future of Business and Finance ((FBF))

Abstract

Distributed ledger technologies (DLTs) and blockchain have enabled the creation of a new form of digital assets (tokens) that can be sold to investors through public token offerings to raise capital in a decentralized and disintermediated fashion, with important implications in terms of cost and time efficiencies. Initial coin offerings (ICOs) were the first development of this innovative fundraising method, and they stood out for their potential to hasten network effects to support the development of blockchain-based projects. However, the scant and ambiguous regulation of ICOs has led to other forms of token offerings more geared towards ensuring investor protection, such as initial exchange offerings (IEOs) and security token offerings (STOs). The differences and similarities between these three types of token offerings are presented and compared to other forms of financing (venture capital (VC), crowdfunding and initial public offerings (IPOs)). A complete overview of the process of launching a token offering is then presented, describing both the ecosystem of agents involved in the process and its main stages.

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Notes

  1. 1.

    Calculations are based on the currency exchange rates at the end date of the public sale, and only completed offerings with an indicated funding volume are considered.

  2. 2.

    In 2008, an individual under the pseudonym ‘Satoshi Nakamoto’ proposed Bitcoin as the world’s first blockchain application for digital payment processing (Adhami & Giudici, 2019; Ackermann et al., 2020). The term bitcoin (with a lowercase letter ‘b’) refers to the unit of the cryptocurrency, while with a capital ‘B’, it refers to the peer-to-peer network, the open-source software, the decentralized general ledger (blockchain), and the software development and transaction platform (Ackermann et al., 2020).

  3. 3.

    In 2015, Vitalik Buterin presented the Ethereum (ether) cryptocurrency and the Ethereum platform based on the concept of decentralized smart contracts (Myalo, 2019).

  4. 4.

    Private keys are equivalent to pin numbers, and public keys are equivalent to bank account numbers. See OECD (2019) for a complete explanation of how digital crypto-wallets work.

  5. 5.

    ERC stands for Ethereum Request for Comment.

  6. 6.

    In March 2021, a project was announced by the Spanish stock market operator (BME) to create a platform that facilitates the financing of SMEs through the issuance of digital tokens.

  7. 7.

    Limiting the number of tokens has an important influence on the value of the tokens (Myalo, 2019) and can limit the risk of token inflation (OECD, 2019).

  8. 8.

    A maximum amount of capital raised can be set as a hard cap to stop the sale of tokens when reached, and a minimum amount can be set as a soft cap to close the contract and return all funds raised to investors if it is not reached (Myalo, 2019). Additionally, maximum individual contributions can be set to diversify the investment base, limit the power of speculators and foster the development of the network, while minimum individual contributions could aim to limit access to institutional investors (OECD, 2019).

  9. 9.

    Adhami and Giuduci (2019) explain that project promoters can retain some tokens to use them to reward future collaborators and advisors or to smooth down in the case of spikes in demand and shortage of available tokens to be spent on the platform.

  10. 10.

    Howell et al. (2020) verify in their sample that most ICOs use a fixed pricing model and that auctions are very rare.

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Author information

Authors and Affiliations

  1. Santiago de Compostela University, Santiago de Compostela, Spain

    Noelia Romero-Castro & Ada M. Pérez-Pico

  2. ESIC Business & Marketing School, Valencia, Spain

    Klaus Ulrich

Authors
  1. Noelia Romero-Castro
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  2. Ada M. Pérez-Pico
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  3. Klaus Ulrich
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Corresponding author

Correspondence to Noelia Romero-Castro .

Editor information

Editors and Affiliations

  1. University of Valencia, Valencia, Spain

    Carlos Lassala

  2. Société Générale, Valencia, Spain

    Samuel Ribeiro-Navarrete

Appendices

Appendix 1: Examples of ICOs

 

ICO

 

Filecoina

EMCODEXb

Fanadisec

Teslafand

Core business idea

Storage

Commodity exchange platform

A platform for NFTs

Decentralized crowdfunding platform

Background

Filecoin is a project of Protocol Labs, Inc. It enables the outsourcing of data storage

It aims to remove the current barriers to direct entry into the commodity market by producers

It aims to decentralize social media and tries to give content back to the creator and to the people

Teslafan is a sustainability-driven tokenized network. It builds a digital platform with the potential to add cognitive ability to businesses

How does it work?

Filecoin’s POW function includes a proof-of-retrievability component that requires nodes to prove that they are storing a particular file

It is a true cross-chain token linking several independent ecosystems

Fanadise is a content platform for influencers to monetize their social presence and interact with followers

Teslafan is a combination of blockchain technology and artificial intelligence and their interactions in resolving the limitations and challenges of the industrial adaptation of machine learning

What blockchain technology is used?

Filecoin

Ethereum

Ethereum

Ethereum

What problems does it solve?

Filecoin aims to store data in a decentralized way

The project aims to democratize the commodity market through blockchain technology

The project aims to adequately reward internet content creators

The project aims to be a key protocol gathering machine learning with investors

  1. aICOholder (https://icoholder.com/en/filecoin), Coinmarketcap (https://coinmarketcap.com/es/currencies/filecoin/) and Howell et al. (2020)
  2. bICOholder (https://icoholder.com/en/emcodex-1001356), white paper of EMCODEX (2021)
  3. cICOholder (https://icoholder.com/en/fanadise-1000240), ICOmarks (https://icomarks.com/ico/fanadise) and Crypotototem (https://cryptototem.com/fanadise-fana/)
  4. dICOholder (https://icoholder.com/en/teslafan-1000504) and Coinmarketcap (https://coinmarketcap.com/es/currencies/teslafan/)

Appendix 2: Examples of IEOs

 

IEO

 

BitTorrenta

Idealogyb

BitcoinAsiac

Quantocoind

Core business idea

Decentralized P2P communications protocol

Business network platform

Travel package company

Virtual bank

Background

It is a peer-to-peer file sharing and torrent platform. The native cryptocurrency token was released in February 2019

It runs an open-source project on Ethereum to create a platform for cooperation

It is a decentralized peer-to-peer cryptocurrency for the travel and tourism industry

It is the first mobile blockchain bank

How does it work?

BitTorrent (BTT) tokens can be bid in exchange for faster downloads. Tokens will be stored in a built-in wallet and can be exchanged for TRON (TRX) tokens through a decentralized exchange

Innovators, developers and investors connected in one platform create an ecosystem that covers aspects from the idea to crowdfunding. Tokens combine payment and utility features

The token holders will be rewarded with various benefits in travel and tourism products. It can be used to book vacations with cryptocurrency

The QTC token is the core of all transactions made in the banking platform

What blockchain technology is used?

Tron

Ethereum

Ethereum

Waves

What problems does it solve?

BitTorrent’s original goal was to disrupt the legacy entertainment industry and how consumers obtain content

It creates a productive environment for business cooperation

It can be used to book an entire vacation with cryptocurrency for Asia Continent

Slow transaction times, access to banking services for the unbanked, high processing fees and fraud and security

  1. aCoinmarketcap (https://coinmarketcap.com/es/currencies/bittorrent/), ICOmarks (https://icomarks.com/ieo/bittorrent) and ICOholder (https://icoholder.com/en/bittorrent-28385)
  2. bICOholder (https://icoholder.com/es/ideaology-31790) and Coinmarketcap (https://coinmarketcap.com/es/currencies/ideaology/)
  3. cICOmarks (https://icomarks.com/ieo/bitcoin-asia) and Foundico (https://foundico.com/ico/bitcoin-asia.html)
  4. dICOmarks (https://icomarks.com/ieo/quantocoin), ICOholder (https://icoholder.com/es/quantocoin-17192), Foundico (https://foundico.com/ico/quantocoin.html) and white paper of Quantocoin (2020)

Appendix 3: Examples of STOs

Table 6
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Romero-Castro, N., Pérez-Pico, A.M., Ulrich, K. (2022). ICOs, IEOs and STOs: Token Sales as Innovative Formulas for Financing Start-Ups. In: Lassala, C., Ribeiro-Navarrete, S. (eds) Financing Startups. Future of Business and Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-94058-4_8

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