Could STOs Take Over Fundraising?
Initial Exchange Offerings (IEOs), along with Security Token Offerings (STOs) have become exponentially prevalent within digital assets investment over the past year and a half; in what has become best known as the ‘post-ICO’ era.
These new forms of investment have their own unique approaches to tackling issues such as regulatory compliance, public trustability, and accountability.
This article in particular focuses on STOs, however if you would like to learn more about IEOs: please check out this article from VlaSem entitled ‘What is an Initial Exchange Offering (IEO)?’ – as well as my own pieces on Paytomat (PTI), TOP Network (TOP).
Scams, Money Laundering, and Global Legislation
Initial Coin Offerings (ICOs) were the predominant form of digital-assets fundraising throughout the rise and fall of cryptocurrency values until last year, although it seems like they have been best remembered for the more negative aspects.
In the US: many assumptions have been made based on the actions and various unofficial (yet broadcast from internal staff) statements – leading to a general consensus that pretty-much all cryptocurrencies are viewed in the eyes of the SEC and federal law as ‘securities’.
Scams and fraudulent activity have been a large contributing factor to this financial retraction of support of investment from the ICO market. This is compounded by the legislative crackdowns that have been instigated by a large number of countries.
Perhaps one of the most notable scandals to hit the press of late involves almost one billion missing US dollars, Tether (USDT), and controversial exchange platform Bitfinex. Other negative signs include the increased rate of ICOs withdrawing their Ethereum back in late-2018.
Current State of STOs
According to colleague Sam Bourgi,
“The security token offering (STO) is a financial security that mirrors traditional shares in a publicly-traded company.
“STOs are governed by federal laws set forth by the U.S. Securities and Exchange Commission (SEC), putting them in the same bracket as traditional securities. This includes specific consumer protection guidelines and rules for soliciting investment from the general public.”
STOs are much more regulated than ICOs of course, but rather than occupying a ‘wild west’ of regulations; they fall within a realm in which the main contributing factors to token-sale success are still undefined and underappreciated.
This includes legal compliance, in addition to marketing strategy and others. It’s a problem which has been somewhat mitigated by the prevalence of specialist STO consultation and advisory services because, as always, enterprise follows financial opportunity.
Such advisory service-providers include agencies like Blockstate and Priority Token. These organisations provide services for projects which fall between a dichotomy of distinctions: STOs and ‘utility tokens’ – and fall within their respective European (in particular, EU) regulations.
As a more entry-restricted method of investment, STOs may have not penetrated the mainstream media to the same extent as their ICO cousins; however you can see the potential and present achievements after a little research.
Top successful examples of IEOs include Polymath. According to Coindesk: the entire investment market has taken in $380 million as of mid-January this year.
STOs: A New Breed of Compliance
ICOs have also always been relatively ‘free’ and unconstrained with regards to legislative controls – mostly owing to the previously unregulated nature of the overall cryptocurrencies markets.
Security Token Offerings (STOs) emerged largely due to this lack of legislative and regulatory clarity provided by the United States’ Securities and Exchange Commission (SEC) with regards to cryptocurrencies. Most likely as a means to seperate them from the ICO stigma.
STOs differ from ICOs (legally and in general definition) is in the fact that they are reminiscent of traditional non-digital ‘securities’ investments – or contracts akin to bonds, stocks or real estate. Technically they are backed by real-world assets.
As such, they help alleviate potential investor-deterring doubt due to their comprehensive focus on ensuring compliance with long pre-existing governance models for securities investments. Simultaneously, this gives STOs less of a ‘radical’, ‘new-investment’ vibe.
Arguably: total integration with traditional regulations and standards would neuter the radical potential and nature of token-based crowdfunding methods, whilst ignorance and contrarianism only serve to increase the institutional pessimism which currently stunts their growth.
Perhaps the greatest downfall to this investor protection is the fact that these increase legislative and regulatory protections bring with them increased constraints and barriers to entry.
According the the Securities and Exchange Commission (SEC) in the USA, specifically in reference to what is now referred to as the ‘Howey Test’, almost all token-based digital asset investments fall under the jurisdiction of ‘securities’. This, however, is not officially written in stone, or legislation.
On the one hand, they offer significantly increased security for investors whilst on the other – they are only available for accredited investors (in the USA at least) which results in a severely decreased pool from which such projects can draw potential investors compared to their non-security token peers.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.