Initial coin offerings (ICOs) — sometimes called token generation events (TGEs) — are fundamentally changing the nature of early seed fundraising, and they have the potential to alter the mainstream investment ecosystem itself. Through ICOs, start-ups can raise capital by issuing crypto tokens on a blockchain, most commonly that of Ethereum, and sell them to investors or contributors.

Two common types of ICO coins are equity tokens and utility tokens.

Equity Tokens:

Equity tokens are a subcategory of security tokens that represent ownership of an asset, such as debt or company stock. By employing blockchain technology and smart contracts, a startup could forgo a traditional initial public offering (IPO) and instead issue shares and voting rights over the blockchain. Additionally, a lender could create tokens that represent debt owned by the company, enabling loans to be bought and sold in a high-liquidity environment.

Many people believe that equity tokens will eventually become the predominant type of ICO token. However, the U.S. Securities and Exchange Commission (SEC) has indicated that equity tokens are subject to federal securities regulations, and as of the time of writing, few startups are equipped with the resources to issue equity tokens that comply with all applicable regulations. Consequently, investors should not contribute to an equity token ICO without obtaining guidance from a legal professional who specializes in federal securities law.

Utility Tokens:

Utility tokens, often called app coins or user tokens, provide users with future access to a product or service. Through utility token ICOs, startups can raise capital to fund the development of their blockchain projects, and users can purchase future access to that service, sometimes at a discount off the finished product’s sticker price.

An example of a utility token is the Basic Attention Token (BAT). As Strategic Coin explains in its BAT token launch research report, the BAT token functions as a medium exchange between users, advertisers, and publishers who participate in the Brave browser ecosystem. Advertisers purchase ads using BAT tokens, which are then distributed among both publishers and browser users as compensation for hosting the ads and viewing them, respectively.

Utility tokens are not designed as investments; however, many people contribute to utility token ICOs with the hope that the value of the tokens will increase as demand for the company’s product or service increases. Utility token price fluctuations can be compared to those of sporting event tickets. The value of a ticket to a future sporting event may increase if one or both of the teams wins a significant number of games and becomes a contender for the championship. On the other hand, that same ticket may decrease in value if a star player suffers an injury or a team goes on a prolonged losing streak.

simply put, while both equity and utility token prices may fluctuate, the key difference is that equity tokens entitle the holder to ownership rights, while utility tokens function as coupons and do not provide holders with an ownership stake in a company’s platform or another asset.

The Difference Between Utility Tokens and Equity Tokens

Two common types of ICO coins are equity tokens and utility tokens.