Over the past years, the Initial Coin Offering (ICO) has gained much attention as an excellent solution for crowdfunding. ICOs generated more than $6 billion in global startup capital throughout 2017, surpassed venture capital financing and became the primary method of funding for blockchain organizations. But the lack of proper regulation was a serious problem that opened the way to fraud and gave rise to the risk of funds loss. Thus, despite the growing popularity of ICO projects, many people still do not understand what are they and if it’s worth to invest in them.
There are two types of tokens that users can receive when participating in the token sale:
- Utility tokens that allow paying for services and products of the issuing company, as well as using services and gaining access to some specific or extra options.
- Security tokens that passed the Howey Test and derive their value from a tradable asset. These tokens are subject to federal securities and regulations.
Respectively, there is Initial Coin Offering and Security Token Offering.
ICO issues that STO must solve
The first problem with ICO is that users who acquire tokens think that they become full-fledged investors and have the same rights as traditional investors: control over company management, voting rights, profit shares, etc. In fact, acquisition of a cryptographic token gives only the right to use it as a commodity or means of payment.
The second issue is that many IСOs are fraudulent and are created to enrich their founders. Need to admit that although ICOs provide startups with the opportunity to raise the capital they need to launch their projects, the majority of startups will still most likely fail. That is why Security Token Offering or STO emerged as a solution to such shortcomings.
The difference between STO and ICO
The key difference between ICO and STO is that STO owners have ownership rights, while Utility tokens can only be used as “coupons” and do not give the rights of traditional investors to its owners.
Venture capitals and investment organizations have found various ways to invest their money while avoiding many of the pitfalls inherent in the ICO. Security Tokens offer a logical solution to the problem from a regulatory point of view as well as regarding risk mitigation. First of all, security tokens fall under the regulations of securities’ circulation and impose responsibility on the companies issuing them. From the investor’s point of view, they are also less risky, since material rights characterize them.
STO, unlike ICO, never bypasses laws and regulations; it only removes financial institutions and intermediaries from the process. It is related to the fact that security tokens are subject to action on the first day of the STO.
There are particular criteria for the companies to participate in STO: net assets worth over $1 million; an annual asset of more than $200,000; organizations that have assets of more than $5 million, as well as a company, all members of which are accredited investors.
Advantages of STO
- Free market impact. Most investment transactions take place within a single country and they cannot reach the global level. With the help of security tokens, asset owners directly sell their tokenized shares to any investor who has access to the Internet. Such a free impact on the market will lead to significant changes in the valuation of assets since there are no existing assets that can be regulated by the free market for today.
- Automated transactions. More often, lawyers do not act as intermediaries but as service providers. In the case of launching STO, issuers will begin to use smart contracts to automate the function of the service provider using the software.
- Lower commissions. Most of the commissions charged during the payments are transferred to intermediaries. Security tokens eliminate the need for most intermediaries, which automatically reduces commissions and dependence on lawyers.
- Faster transaction processing. The more people are involved in the transaction, the longer it will take. With STO, selling tokenized securities will proceed much faster. Moreover, regulation governed by a smart contract will make security tokens an attractive asset for both issuers and investors.
- Expanding the investors base. If asset owners can offer their securities to anyone with an Internet connection, the potential investor base will increase significantly. This will ensure adequate competition and long-term profit for financial markets.
Security tokens have already attracted considerable attention from large traditional financial companies and organizations. Also, the blockchain immutability provides security-tokens with characteristics of a trusted property, which eliminates the need for custodial services and third-party supervision.
At INCRYPTICO, we believe in a new and safe form of investing in blockchain projects as STO. We are glad to be working with startups which use such investment methods to ensure transparency and proper regulation.