What is a Security Token Offering (STO)?
Just months ago initial coin offerings (ICOs) seemed unstoppable.
Between January to March of 2018, ICOs had collected more than $6.3 billion from cryptocurrency investors, surpassing the total ICO investments for the whole of 2017.
However, the SEC and other regulatory authorities soon began to regulate.
While the SEC has not yet introduced any formal legislation on ICOs, SEC Chief Jay Clayton has been straightforward in his remarks that ICOs should be handled as securities. Other regulators, such as Swiss FINMA, have also confirmed their position in securities offerings; for now.
What is an STO and what differentiates it from an ICO?
From this mist of regulatory ambiguity grew the Security Token Offering.
Fundamentally, an STO is an ICO that complies with securities laws. Hence, an STO strives to comform with securities legislation based on the geographic location of its investor base. STO investors can be sure that they are buying shares in the business itself.
Unlike an ICO, an STO sale generates responsibilities for the token issuer and awards legal rights to the investor. Another difference Is that an STO investor has the capacity to recover part of his/her investment if the venture fails and the business proceeds into liquidation.
While the ICO has been focused on a means of raising funds for new businesses, the possibilities offered by STOs could suggest that any established business can just tokenize their current equity instruments.
Lastly, unlike an ICO, security tokens are not sold on unregulated cryptocurrency exchanges, but on cooperative trading platforms. Because security tokens are a reasonably new concept, most of these platforms are still in their starting phases.
Coinbase announced that it will soon begin operating with security tokens, while the New York Stock Exchange (NYSE), owner of ICE (Intercontinental Exchange), is launching a trading platform compatible with digital assets called Bakkt.
Complying with regulations could require significant burden on an STO depending on where tokens are offered to investors. Now that many investors are entering the blockchain space, especially in the Far East, many are looking forward to investing in STOs, as they have become the new craze within the industry.
Examples of STOs
As of today, there have only been few examples of a security token offering because the process is in its early stages for many.
Blockchain Capital was one of the original pioneers.
This company is a venture capital firm which raised $10 million within a few hours of opening its STO earlier this year. The proceeds were then transferred to one of the company’s hedge funds.
Science Blockchain is a different example. This company raised $12 million for its incubator in a fund focused on blockchain investments.
Lastly, Sia, which is a cloud storage platform based on blockchain and currently has their STO underway. The Sia platform operates two currencies, the Siafunds currency, which is sold as an STO. Also, users of Sia cloud storage can perform transactions in Siacoin, as the platform’s utility token.
Setting up an STO
Successful hosting of a security token offering in this arena requires requires significant experience, primarily since the concept is still in its infancy. Launching an STO is an entirely different approach and is subject to much more regulatory burden than an ICO, in terms of legal and monetary frameworks, as each token represents a value.
The regulation is still unclear in several jurisdictions throughout the world. Investors and regulators are analyzing these projects much more rigorously. For this reason, it is essential to partner with the appropriate team of advisors to help navigate the process.
In lieu of recent advancements in the blockchain space, there is no doubt that the industry is going towards a future overshadowed by STOs.
While ICOs offered an extraordinary mean for financing new businesses, STOs are prepared to improve these fundraising opportunities further. By adding new investment funds into the goal of technology development and including institutional contributions, these all can result in an entire change of the laws to the way funding continues.