STO’s & JOBS Act: The Perfect Storm

In my most recent article, I discussed the fantastic growth-potential of STO Issuance Platforms.

In this piece I’d like to expand on a topic which, if fully understood, should enable a deeper appreciation of just why Security Token Offerings (STO’s) can produce a seismic shift in the hitherto-static landscape of Capital Formation (i.e. business funding).

The US-legislation underpinning the conclusions reached in this article is the Jumpstart Our Business Startups Act (JOBS Act). The JOBS Act was created in 2012 to ease the regulatory burden placed upon small businesses by the Securities and Exchange Commission (SEC). Its formation was conceived after a downturn in small business activity following 2008’s financial crisis. The Act was developed to ensure that small firms with innovative ideas, those which the SEC define as “emerging growth companies”, could hit the ground running without the need to hurdle the numerous obstacles associated with onerous regulatory requirements.

Whilst the JOBS Act enabled small businesses to go public with less than $1 billion in annual gross revenue and afforded legitimacy to capital formation via crowd-funding through platforms such as Kickstarter; the mechanisms and allowances outlined by the JOBS Act have not been utilised to any significant degree.

It’s worth noting that new amendments to the JOBS Act are currently being considered by US lawmakers which would further relax and clarify existing regulations for small businesses, including a proposal to expand the definition of an Accredited Investor (which would lead to an increased number of US-based investors qualifying for Accredited Status) and further loosen those laws restricting general solicitation (i.e. advertisement of investment opportunities).

HOW DOES THIS AFFECT STO ISSUANCE PLATFORMS?

Whilst the JOBS Act, like much government legislation, is a tiresome and overtly-wordy read; it does make two changes which are hugely significant from the perspective of STO Issuance Platforms:

1. It lifts the ban on “general solicitation” and advertising in specific kinds of securities offerings
2. It allows the use of government-registered internet “funding portals”

The ability to advertise an offering without contravening SEC regulations means that small businesses, being generally unknown and not benefitting from a wide-spread network of investment contacts or databases, can now actively publicise their offerings and can, therefore, expect to capture a significantly higher number of investors than previously possible.

The ability to utilise online funding portals — already familiar to a whole generation of internet users — opens the door to huge swathes of people who seek a straightforward method of investment not reliant on broker-dealers or other third-parties. This direct manner of investment exactly aligns with the expectations of those people who fuelled the ICO-craze to the tune of $20b since 2016. A simplistic, direct and easily-understood investment mechanism can, and will, make investing accessible to all whilst, at the same time, democratizing the process of Capital Formation to the benefit of small businesses.

AN ALTERNATIVE PERSPECTIVE ON SECURITY TOKEN OFFERINGS

The regulatory changes outlined above have been in full effect since 2016. However, it’s the synergy of the changes outlined in the JOBS Act being combined with the new technology of blockchain that presents an opportunity to transform Capital Formation processes.

I have previously touched upon the near-boundless tokenization opportunities afforded on a global scale, wherein a massive increase in the number of STO Issuance Platforms is required to adequately service this market. My conclusions in this regard are based upon the tokenization of existing securities markets and the upwards of $250 trillion of additional global assets which are ripe for tokenization.

However, from personal experience, it appears that the general perception of STO mechanisms are limited to the extent that they will afford businesses an opportunity to raise capital more affordably, effectively and easier than the current systems allow.

This is, of course, true — and it’s one of the reasons I find myself so excited by the Security Token space — but it fails to address what I consider to be one of the most electrifying truths in this whole process; that we are faced with a perfect storm of favourable regulatory change, technological advancement and a proof-of-concept offered by ICO funding mechanisms which, in a very real sense, means that everyone — on a literal person-by-person basis — will now be afforded an opportunity to act as an Issuer and raise funds to pursue their own financial growth.

Let that sink in for a moment…

Now wipe the drool from your chin and allow me to further whet your appetite.

It is my strong belief that, when the technological foundations beneath an issuance mechanism are correctly built; STO Issuance Platforms can empower individuals to become Issuers and build their own personal wealth.

It is this personal market — the “tadpoles” swimming beneath the whales — that will represent a truly gargantuan sector of business for those STO Issuance Platforms savvy enough to cater to it (whilst simultaneously leaving themselves open to the prospect of harpooning larger aquatic beasts).

Servicing such a market will require that the Security Token creation process is simple, efficient and easily-understood. It will require that the entire process is self-contained; token creation, legal documentation/compliance, token issuance, shareholder communication and ongoing management processes — all set within a single dashboard for the entire lifecycle of a Security Token.

In addition to the above, the process must be as economical as possible. For most people to even begin considering a Security Token Offering, the cost associated with the process must be attainable from the perspective of the average individual. In the US, the average person under the age of 34 have personal savings of just $4,727, whilst those aged 35- 44 have an average of $10,399. Cost is key to capturing this enormous market and service fees must be adequately weighted.

Whilst catering to this type of market is clearly a difficult act of balancing cost, simplicity of front-end technology, and service scope; for those STO Issuance Platforms which pull it off, the benefits may well be unmatched.

In discussing the inherent value of any STO Issuance Platform, it would be amiss to fail to highlight the investor database as a significant source of value. As each and every Issuer is on-boarded, their details are recorded in the investor database. The higher the number of Issuers who register with an STO Issuance Platform, the higher the value of the investor database. The economic worth of a database of global investors is profound and, from the perspective of sheer numbers, a market comprising individuals and very small businesses — the tadpoles — represents a literal goldmine for STO Issuance Platforms. In essence, as more individuals are on-boarded as Issuers, the platform profits not only from processing fees, but also from the accumulation of investor data as each and every STO plays out.

Since the date of the very first Initial Coin Offering, there have been a total of 5,542 ICO’s. Using these figures as a crude yardstick, if a single STO Issuance Platform were to capture even 50% of this market in future offerings — this would represent 2,771 Security Token Offerings. However, when the numbers associated with the individual markets are considered, in the US alone, then you should start to get a sense of why I’m so fantastically excited by the opportunities on our horizon:

· 38 million home-based businesses

· 19 million network marketers

· 1.3 million realtors

What do you think happens when these groups are empowered with new, simple, inexpensive tools to build personal wealth?

Truly explosive growth.

I am convinced that when people understand that the power of the STO is not limited to an investment perspective, but also extends to a tool which can be utilised for personal wealth creation; the penny will drop and the whole sector — tinderbox dry — will spark into the kind of wild fire that will make the ICO-era look like a ripple in the ocean.

An understanding of the scope of what the Security Token Offering can do, for businesses and individuals alike, will spread exponentially as we educate one another on the gaps in our knowledge.

I mentioned earlier that the mechanisms and allowances outlined by the JOBS Act had not previously been utilised to any significant degree. As a result, many have been quick to label the JOBS Act a flop. However, in my humble opinion, it appears that the only people who truly knew about the changes afforded by the Act — the intricacies linked to online funding portals and the lifting of advertising restrictions — were those already in the industry, such as stock brokers or broker dealers. The wider population are still, it seems, mystified by the apparent high-art of Capital Formation and therefore content to leave it to the Wizards on Wall Street.

However, what I’ve hoped to have made clear within this article is that the perfect storm has arrived. Fuelled by a change in advertising rules and the ease of online fundraising (JOBS Act); the global reach of online advertising (JOBS Act + Internet/Social Media); and the regulatory compliant One-Stop-Shop that a marriage of smart contracts and blockchain technology enables (STO Issuance Platforms); we’ve arrived at the very precipice of our financial future — a robust, affordable and widely-accessible funding mechanism for global businesses of all sizes.

When we simplify something valuable and make it more affordable, the result is an increased demand. In this instance, that something is access to global capital.

You better believe that the wave is building… Make sure you’re ready!