According to EY, the volume of funds raised through traditional IPOs rose by 40% to $189bn (1,624 companies) in 2017. There were 1,000 IPOs globally with the total volume of $145.1bn in Q1-Q3 2018.
Dow Jones Index: 23879.12 points on January 9, 2019; 21792.20 on December 24, 2018
S&P 500 Index: 2584.96 points on January 9, 2019; 2351.10 on December 24, 2018
Trends in 2018
2017 was the year of initial coin offerings (ICOs) — startups raised over $5.3M billion through ICOs, and that figure doesn’t include EOS, but 2018 was the emerging year for security tokens and private offerings. Security tokens have the potential to bring the classic fiat and crypto economies much closer together. Additionally, a number of factors will lead to the further development of the industry.
Attraction of significant capital for large private token offerings
More and more companies that build blockchain-based projects and technologies are switching to private token sales that face less scrutiny from the SEC and other regulators.
Emergence of the crypto securitization platforms
One of the main applications of security tokens is the securitization of real-world assets. These assets can be moved on-chain and utilized in smart contracts that replicate the business logic of those processes. It also raises a lot of questions about regulations, verifications, KYC processes, and AML processes. These platforms intend to solve these considerations in an automated way so the issuers don’t have to.
Establishment of a clear security framework by the SEC
Before 2018 there was little to no regulation specifically for cryptocurrencies and the old rules defining a security have proved inefficient in their application to the crypto tokens. After a few major cases where the Security and Exchange Commission (SEC) requested documents from ICO projects and shut many down, demanding they return their funds, a more distinct line has been drawn. Market participants have a clearer understanding as to whether their token might be considered a security or not.
Widespread adoption of the new generation of stablecoins
Although Tether started with a white paper in 2012, it faced a lot of scrutiny from the community for its connection to the Bittrex exchange and questions about its collateral accounts and failed audit. But recently we have seen new stablecoins like USDC and TrueUSD. They have been adopted by the most popular and trusted cryptocurrencies and will fuel the adoption of crypto by ordinary people and businesses.
What Are Security Tokens?
Security tokens are cryptographic tokens that represent a security as defined by local regulations. In the U.S., the regulations are set by the SEC, as already mentioned. In order to determine if a particular investment can be considered a security under the Securities Act of 1933 and the Securities Exchange Act of 1934 — and therefore subject to certain disclosure and registration requirements — the SEC applies something called the Howey Test, which was created by the Supreme Court.
Under the Howey Test, a transaction is an investment contract if:
- It is an investment of money.
- There is an expectation of profits from the investment.
- The investment of money is in a common enterprise.
- Any profit comes from the efforts of a promoter or third party.
Although the Howey Test uses the term “money,” it includes investments of assets other than money. The term “common enterprise” isn’t precisely defined. Most courts define a common enterprise as one that is horizontal, meaning that investors pool their money or assets together to invest in a project. However, there are other definitions.
There have been several major private token sales that were limited to accredited and institutional investors — a stark contrast to the large crowdsales before that were mostly raised from a public audience. This is a major shift in the perception of token sales and securities in the crypto world in general.
Telegram has postulated its vision to build TON (Telegram Open Network), a blockchain-based platform that will envelop its messaging app, which has 200 million active users, and add a range of features that will include decentralized storage and payments, censorship-resistant browsing and decentralized apps hosted right on the platform.
Initially Telegram was planning to make a public ICO with a large private pre-sale of $850 million for accredited institutional investors. But the demand was so unpredictably big that the company canceled the public sale component of its ICO after raising $1.7 billion from private sale investors, according to SEC filings. It’s most likely that Telegram got enough money to develop TON without the risk of running into the SEC’s ongoing ICO probe by soliciting money from the public.
It’s worth noting that although Telegram was selling securities in the sense of the SAFT agreement (Simply Agreement for Future Tokens), the tokens themselves are utility tokens, just as was the case for the Filicoin token sale in 2017. According to leaked documents, Telegram is planning to start publicly testing the first parts of its system in Q1 2019.
tZero is a subsidiary of Overstock set up to serve as an exchange for security tokens. tZero ran a private token offering and initially limited the raise to $250 million, although it is currently unclear how much was actually raised during the round.
The company initially introduced the STO in the form of an ICO in December last year, having attracted strong crypto and traditional institutional interest that reportedly resulted in $100 million committed to the platform during the first 12 hours. Overstock had filed for its ICO to be classified under Regulations D and S instead of as a traditional securities filing, meaning that the U.S. citizens and entities must be accredited investors to participate.
Vault12 offers decentralizes custody for cryptocurrency. Put another way, it provides digital custody, giving cryptocurrency owners a simple yet robust way to remove risks associated with hacking and the accidental loss of credentials — all in an easy-to-use mobile app.
Vault12 enables user to safeguard cryptocurrencies using a cryptographically secure network made up of trusted people and devices. The company has introduced a fully private, self-managed and highly reliable cryptostorage system that uses an approach invented by Adi Shamir, one of the world’s foremost cryptographers and co-inventor of the RSA algorithm.
TaTaTu is a video-on-demand and social platform that rewards users for watching movies, music videos, sports, gaming, and celebrity content. The TaTaTu token offering claims it has sold $575 million worth of digital coins in a private sale. The offering has apparently seen the participation of Prince Felix of Luxembourg, BlockTower Capital, Lady Monika Bacardi and Lyna Capital.
According to the company, the TTU Tokens will serve as the currency for a blockchain-based social entertainment platform called “TaTaTu.” These tokens will be used to “compensate content creators as well as members of the platform who view content and pay for advertising on the platform.”
Basis is a price-stable cryptocurrency which is not collateralized with fiat like Tether. When Intangible Labs first published its white paper in June 2017, the company described Basis as an “algorithmic central bank” that would give users a stable currency with which to conduct financial transactions around the world, similar to bitcoin but without the wild price swings experienced by other cryptocurrencies.
Basis raised around $133 million in capital from the likes of Google Ventures, Andreessen Horowitz, Bain Capital and others.
In December 2018, Intangible Labs then announced the project was being killed and all funds returned. Insiders said the company ran into “regulatory headwinds” as it attempted to launch its in-house crypto asset. Nader Al-Naji, Intangible Labs’ CEO, gave an interview to Forbes where he explained what happened. “We met with the SEC to clarify a lot of our thinking,” said Al-Naji. “The SEC generally avoids saying that something will definitely be one way or the other. But from that meeting we got the impression that we would not be able to avoid securities classification.”
Orbs is a Tel Aviv-based startup that provides the blockchain infrastructure that makes it possible for established consumer brands to transition their millions of existing users to the new decentralized economy.
The company wants to build customized blockchain infrastructure for companies, similar to how Amazon Web Services offers cloud-based computing, but independent of giant tech companies like Amazon, Google and Microsoft.
Adopting Orbs alongside Ethereum allows DApps to enjoy the best of both chains: unmatched security, liquidity and ecosystem integration, together with low fees and production-ready scalability. Orbs developed two technologies to make this possible: virtual chains and randomised proof of stake. Virtual chains are intelligent sharding and unlike current sharding solutions that randomly split traffic, virtual chains optimize (lane) usage by allocating one per app, while the Orbs rPOS consensus allows for the security and decentralization benefits of 1,000 nodes while enjoying the speed of 21 nodes.
To that end, Orbs has raised roughly $106 million from unnamed customers and strategic partners, the company’s co-founder, Tal Kol, told Calcalist on Monday. The funding brings Orbs 80% of the way toward a goal of raising $133 million.
While some of the largest blockchain-focused companies looking to raise capital have decided to forgo the ICO model, some have used the classic IPO model to raise capital for their operations and growth. Some of them, like the founder of Bitmain, are seemingly dissatisfied with the ICO token model and its innate governance and incentives: “I believe ICOs are kind of an unsustainable financial bubble. It will burst eventually. It’s just a matter of time. I believe it’s just one year or two. Either way, it will just disappear.”
It’s worth noting that IPOs have always been hard and that the industry became even more regulated after the dotcom crash. The number of publicly traded companies in the U.S. was about 4,300 as of 2015, down from a 1996 peak of about 8,000, according to a 2017 study from accounting firm EY. And in 2016, 112 initial public offerings occurred, down from 291 in 2014, the year IPOs reached their highest level since 2000.
Preparation for an IPO is expensive, complex and time-consuming. Lawyers, investment bankers and accountants are required, and often outside consultants must be hired. It can take a year or more to prepare for an IPO. The largest direct cost is the “underwriting discount,” a cost that is usually set as 5% to 7% of gross proceeds for the underwriter (i.e., if the firm raises $100 million it is paying $5 to $7 million to the underwriting bank).
As a result of the IPO, the company is listed on a U.S. stock exchange and subject to SEC oversight and regulations, including strict disclosure requirements. Among the required disclosures is information about senior management personnel. Its finances and details about business operations are open to government and public scrutiny.
Bitmain represents the dominant force in bitcoin mining. Two prominent Bitcoin mining pools, BTC.com and Antpool, contain 27% and 15.3% of Bitcoin’s hashrate respectively and Bitmain owns and manages both of them, allowing the mining superpower to oversee over 42% of Bitcoin’s hashrate.
China Money Network reported that Bitmain raised over $400 Million U.S. in a pre-IPO funding round. Sequoia Capital’s China branch, a venture capital firm, reportedly led the pre-IPO funding round where Bitmain was reportedly valued at $12 billion.
That means Bitmain will likely aim raising capital through an IPO in a short timeframe of the next few years on the back of revenues worth at least $3 billion for 2018.
Binance, one of the largest cryptocurrency exchanges, has recruited an executive with wide experience in IPOs as its chief financial officer. Wei Zhou, who is currently the vice chairman of gay dating platform Grindr, boasts 15 years of executive experience. This has led to speculation that, with the hire, Binance is preparing for an IPO.
But after a report by Sludgefeed this week suggested just that, CEO Changpeng Zhao denied this was the company’s goal.
Huobi is a Chinese blockchain services provider and a cryptocurrency trading platform offering an exchange, trades, wallets, and storage.
Huobi has reportedly bought a majority stake of 73.73% in Hong Kong-listed electronics manufacturer Pantronics Holdings, spurring speculation that the exchange is planning an IPO through a reverse takeover.
According to shareholder disclosures filed by Pantronics Holdings on August 21, the company has transferred more than 221 million of its ordinary shares to several Huobi subsidiaries. The agreed price per share was HK$2.72 ($0.35), valuing the deal at around $77 million.
The deal enables Huobi chairman Li Lin, the largest Pantronics shareholder, to control 73.73% of the firm. This would allow the crypto major to take over the public company and then enter the secondary financial market, a procedure called a reverse takeover, or backdoor listing.
When asked whether the exchange intends to conduct a backdoor listing, Li Lin reportedly said that “it is just a rumor.” He stated the exchange business is currently not fully compliant on a global scale, so a backdoor listing would be very difficult to operate and added that he believes the “traditional financial market will embrace the blockchain economy in the future.”
tZero’s blockchain technologies aim to revolutionize the market and fix the inherent inefficiencies of Wall Street, so that financial processes are less beholden to traditional, institutional market structures.
Harbor is helping power the next big wave in capital market, tokenized securities, by automating regulatory compliance. It aims to address the regulatory challenges of trading private securities on blockchains, including ICOs. Harbor announced $10 million in Series A financing to build a decentralized compliance protocol for standardizing crypto-securities issuance and trading. The financing was led by Vy Capital, Fifth Wall Ventures and Valor Equity Partners. Previously, Harbor was incubated by the new firm Craft Ventures.
Harbor’s announcement comes as ICOs face increasing scrutiny from regulators. The SEC has warned that many ICOs may ultimately be classified as securities and has already taken action against several firms for violations. Harbor wants to help protect issuers and investors by making it easier to abide by securities, tax and other regulatory requirements when issuing and trading crypto-securities.
Polymath is the interface between financial securities and the blockchain. The platform simplifies the legal process of creating and selling security tokens. Polymath has developed a new token standard, the ST20, in order to enforce compliance.
This is achieved via limitations embedded directly in smart contracts that allow only a list of authorized investors and their Ethereum addresses to hold these ST20 tokens. Token issuers who use ST20 tokens don’t need to worry about the legal implications of potential transfer of those tokens. All transactions on the Polymath platform take place using the native POLY token. Due to the continuing government crackdown on ICOs, Polymath hopes to instead provide legal STOs.
OpenFinance Network is a trading platform for tokenized securities. The platform serves as a conduit between issuers, investors, and industry stakeholders, offering streamlined access to liquidity and asset transfer efficiencies. OpenFinance Network has just moved from beta to full trading functionality, representing the first launch of a live, regulated security token trading platform in the U.S. The platform is available to accredited and non-accredited investors both in the U.S. and abroad.
One of the security tokens available to trade at launch is Blockchain Capital (BCAP), a tokenized venture capital fund focused on digital assets. Blockchain Capital is a pioneer in the space, one of the first to issue a compliant security token offering.
BCAP security tokens will be powered by a DS protocol developed by Securitize, a platform for issuing and managing digital securities on the blockchain. The protocol will enable these digital securities to be traded in a compliant way across global marketplaces and exchanges.
Templum, LLC operates at the intersection of blockchain and digital assets in a manner that facilitates transparent access to capital with a focus on investor protection. Utilizing a so-called alternative trading system (ATS) that is subject to regulation from agencies like the SEC and the Financial Industry Regulatory Authority (FINRA), the startup is hoping to develop both primary and secondary markets around such tokens.
The New York-based trading technology company has attracted $10 million of funding from Japan’s SBI Group. Other investors include Raptor Group, Galaxy Investment Partners, Blockchain Capital and firstminute.capital.
Token trading platform Templum Markets has also launched a sale of a security token on behalf of a popular Colorado resort. Accredited investors can indirectly own shares in the St. Regis Aspen Resort by purchasing so-called “Aspen coins” through the regulated broker, the company announced Wednesday. Aspen coins represent shares in the resort through a holding company, according to a press release.
BnkToTheFuture is an online investment platform for qualifying investors. Investing in startups and early stage businesses involves risk, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of diversified portfolio. BnkToTheFuture.com is targeted exclusively at investors who are sufficiently sophisticated to understand these risks and make their own investment decisions. They are shareholders in a FINRA- and SEC-registered U.S. broker-dealer and SEC-registered Alternative Trading System (ATS).
BnkToTheFuture was originally set up to offer securities before tokens existed. Now, the company aims to use its registrations to help move the securities token market forward, including launching its own securities token trading market in 2018. It has over 50,000 accredited investors and almost $300 million has been invested into funding rounds listed on the platform.
Token Market is an online marketplace where you can buy and sell alternate cryptocurrencies, or even create and launch new tokens of your own. It also provides impartial industry news, ICO advisory services, and market pricing, on top of listing upcoming ICO projects and providing STO services.
They wish to use the decentralized nature of blockchain technology to create investment opportunities, and they believe that cryptocurrencies have the power to democratize and streamline the investment market. TokenMarket was included by the UK Financial Conduct Authority (FCA) in its Regulatory Sandbox to focus on STOs.
Predictions for 2019
United Traders is closely monitoring the security tokens market. The following insights and forecasts are provided by Alexey Markov, the leading trader of the company.
The industry is developing faster than ever and many fintech companies and financial institutions are trying to monitor it closely. On the other hand, there is a clear lack of reliable information and actionable insights. Nevertheless, we should expect the next wave of the crypto craze due to the intensive development of security tokens.
The ICO boom that we saw recently was caused by the immaturity of the industry and a lack of appropriate regulation and guidance. The “classic” ICO will likely never return. Still, in terms of funding, the model proved to be quite beneficial for startups at the moment: a huge number of investors instantly mobilized their resources and set up an impressive number of funds bringing that capital to the blockchain-powered projects across the world.
What could have affected this:
- Accessibility. Generally speaking, it is almost impossible to enter the funding rounds of startups with the most potential and demand. The most connected funds of Silicon Valley compete for those rounds, leaving no place for the outsiders. The ICO model erased such boundaries. People were able to invest without worrying about geography or being accredited investors. All they needed was the technical knowledge to understand the projects’ ideas were able to invest.
- Average check size. Many potential investors are also shut out by minimum entry thresholds. But if 10,000 people invest $1,000 each, it represents $10 million raised without anyone having to cut a huge check. It has become customary to organize private sales for larger funds but in most cases the general audience is still able to invest their money and support a promising project or technology. Usually these people are the ones who got in the industry before the rest. They have significant funds secured in cryptocurrencies and a good understanding of the market.
Security tokens can help VC funds enter the crypto. There were practically no funds from the traditional financial markets in the early days of crypto. All sorts of barriers that prevent them can be overcome with the help of security tokens. Let’s take a look at a few aspects of the security tokens ecosystem and their influence on investments in the industry:
- Legal aspects. The legal field was one of the most discussed crypto topics in 2018. In order for investors from all over the world to have the same level of access to a single financial instrument, the regulatory applications must be the same for everyone. There should be a single mechanism of regulation, from the protection of investors’ rights to the distribution of dividends.
Some progress have been made in this regard. The SEC had developed legal practices and a framework that companies are adapting to. The strength of security tokens in comparison with the most popular utility tokens today is the ownership rights the former provides. That means investment risks are lower, which directly affects conservative investors with large capital.
- Barriers to entry in crypto assets. The cryptocurrency market is extremely volatile right now, which scares away both institutional and small investors. The risk of sharp fluctuations and, of course, the lack of liquidity does not always allow people to make a positive decision about entering.
The development of the stablecoins, which we are witnessing, is designed to solve this problem. In fact, this is a gate that connects the fiat world with the digital one, and there’s a great potential of significant increase of demand for these coins. On top of that, the market lacks more robust user verification, KYC, and auditing.
- The reaction of the authorities to what is happening. It isn’t surprising that China has already begun to hold off the emergence of security tokens. The market saw something similar in the summer and autumn of 2017, when the Chinese authorities introduced a total ban on cryptocurrency. The quote that was popular at the time: “Buy everything that China prohibits.”
Conclusions and forecasts
- Despite the fact that 2018 was a difficult year for the entire crypto industry, there has been the gradual convergence of this market and traditional ones. The bridge that supports this process is security tokens. Thanks to them, startups can significantly reduce the costs required to raise capital and investors gain more direct access to promising companies. Intermediaries like classical underwriters and depositories are replaced by the blockchain registries, smart contracts and reliable custodians.
We do not expect a massive growth in 2019 considering the main barriers listed above. But the foundation laid out by the most promising blockchain-based companies and modern regulators will enable a dramatic shift in the market in around two years.
About the Publisher
United Traders is a community of professional traders and investors. We develop stock market trading applications and share unconventional investment ideas. We are now launching a cryptocurrency exchange.
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