Research Suggests STOs Are Better at Financing Startups than ICOs

Thomas Lambert, Daniel Liebau, and Peter Roosenboom from the Rotterdam School of Management suggest that Security Token Offerings are better at financing start-ups than Initial Coin Offerings. Their research was published on July 14 via the University of Oxford Business Law blog. 

The research paper pointed out that although ICOs and STOs are both issued on distributed ledgers, the idea behind an ICO is “value creation for a community. Utility tokens in ICOs can only grant holders with consumptive rights on services or products and can not be seen as a “financing mechanism”.  However, STOs can. Researchers explained that:  

“Tokens issued in a STO are investment products which usually confer cash flow rights to investors and, in some cases, also voting rights. A STO is thus specifically designed to finance startups, whereas an ICO aims at funding an organization but does not include its financing.”

Determining factors for success

A security token is a digital representation of an investment product, recorded on a distributed ledger, subject to regulation under securities laws.

STOs can be issued both early in the lifetime of a firm as equity tokens or later as fund tokens. Researchers found that corporate governance is another factor for success. The paper concludes: 

“Even in the STOs’ more ‘transparent’ blockchain-based context, unbundling voting rights and cash flow rights negatively correlates with success outcomes, consistent with the traditional corporate finance view.”