STO versus IPO

Both STOs and IPOs issue new securities, and therefore adhere to securities laws. Both need to follow AML as well as KYC. They differ in several key areas.

An IPO process is time- and resource-consuming. The JOBS Act, signed into law on April 5, 2012 by President Barack Obama, permits startups and small businesses to be able to raise capital from the public without going through the lengthy IPO process. Title III of the JOBS Act, also called the CROWDFUND Act, defines a method for companies to issue securities via crowdfunding, which was not permitted before. In essence, the JOBS Act modified the Security Act of 1933 and eases securities regulations to make fundraising easier for startups and small businesses.

Although the JOBS Act was not created especially for the blockchain and cryptocurrency industries, the STO process utilizes the act for obtaining an exemption from IPO to issue a security token. This significantly reduces STOs duration and costs. Currently, security token issuers in the US can apply for one of three exemptions: Reg D, Reg A+, and Reg CF. They differ in the following places:

• The annual offer limit
• General soliciting
• Investor requirements
• SEC filing requirements
• Restriction on resales
• Preemption of state registration

Other differences between STOs and IPOs are summarized as follows:

• IPOs are restricted to institutional investors. Often, an IPO is a local event in a country. Accessing foreign investors can only be afforded by established companies due to the associated costs and risks. Some jumbo and high impact IPOs such as the Alibaba listing on NYSE on September 18, 2014 may attract global investors but are limited in scope. A foreign investor needs to have a broker account at the country when an IPO takes place, which is not necessarily easy to achieve. STOs provide an easy way of reaching an individual, as well as institutional investors globally, thanks to crowdfunding. In other words, STOs are not limited by geographic borders and are open to more investors over the internet, regardless of the size of a company. Past examples of ICOs that have raised tens of millions of USD within the first minute testify the advantage of reaching out to a global pool of investors. Reaching out to global investors will lead to greater secondary market liquidity post STO.
• With an IPO, a security issuer does not work with investors directly. Instead, between them, there are multiple layers of middlemen. For example, at one side, the issuer works with the underwriters (investment banks), who in turn work with global broker-dealers to attract investors. On the other hand, an investor works with a local bank, who then interacts with a broker-dealer to participate in the offering. The STO process still involves intermediaries such as lawyers. However, a security token issuer directly interacts with investors on an STO offering platform.
• IPOs are suitable for established companies normally with recurrent revenues and tested business models. These companies present smaller risks to investors. As a result, IPOs attracts high quality institutional investors. For example, by law, certain institutional investors such as insurance companies are restricted from investing in securities with high risks. They may not be qualified to invest in STOs.
• Compared to IPOs, STO issuers pay far less to investment banks and broker-dealers. Since the majority fees of an IPO go to underwriters, the overall costs of STOs are much lower than those of IPOs.
• Security tokens are created with smart contracts. Compliance that's relevant to STOs can be programmed and enforced in code. For example, rules such as transfer restrictions and security lock-up period can be programmed into the security token. That will make STO and post STO administration faster, cheaper, easier, and more robust. IPOs do not have this advantage.
• Security tokens allow for fractional ownership, just like a BTC can be split into fractions. IPO issued security has the smallest unit, one share, which cannot be divided further.