Having experienced an incredible rise at the turn of 2017–2018, the ICO industry gradually began to decline. And if in the best periods, the monthly investment amounts exceeded the figures of $ 1.5 billion, in December 2018, only $ 75 million of investments were attracted.
However, in 2019, the “initial coin offering” remains a promising tool for raising capital, but the first to come is the new trend — Security Token Offering or “tokenized securities.”
What is the difference between ICO and STO, between utility tokens and tokenized securities? And why is the second option seems preferable for an investor?
What Is STO
STO abbreviation means Security Token Offering.
At ROKKEX, we believe that it is STO that will replace ICO in the crowdfunding market. The fact is that in this funding instrument, the best qualities of ICO and IPO are combined. STO has the reliability that an IPO has and also the relative simplicity and accessibility that is inherent in ICO.
This is the reason why we’re launching STO in Q3: aiming to build a platform for other projects to start their STO.
What Is Security Token
This asset is similar to traditional stocks, to which everyone has already managed to get used to. Security Token is a kind of investment highly supervised by regulators. This means that a company’s failure to meet financial obligations to its investors will entail litigation.
Depending on the structuring, security tokens can be any of the listed assets:
- ownership of real assets;
- equity participation in a commercial enterprise or fund;
- debt ownership;
- the right to receive income as a result of owning a physical asset, an enterprise’s activity, or owning a debt obligation.
The type of tokenized assets affects not only the attractiveness of tokens for investors but also the list of legal requirements that apply to such tokens.
Features of Participation in STO
The STO abbreviation means that the tokens have the characteristics of securities, therefore, will have to meet the requirements of financial regulators. No licenses are needed to start an STO.
Who Can Buy Security Tokens
It is already more difficult to purchase tokenized securities, since access to them is open to accredited investors (but not limited to), according to the requirements of financial regulators, and therefore it is necessary to have a capital of several hundred thousand dollars to acquire security tokens.
What Benefits Security Token Holder Gets
Utility tokens do not give any rights to their holders. They can later be sold or used in the created ecosystem. The investor’s rights end there, while security tokens can be supported by real shares of companies, provide the right to receive dividends and even the right to vote in individual cases. Such features provide less volatility in the cost of tokens.
Is STO Secure
Among the main advantages of security tokens is a high level of investor protection. STO provides greater security for investors, as it complies with legal regulations, which makes STO legitimate for investments in the modern world. It minimizes opportunities for fraud.
Besides, consider that it is not easy to run an STO because it requires a lot of documentation and compliance with the recording procedures. It takes a lot of money, time and patience and, depending on the requested exception of the SEC, a financial audit — for the US. This is simply impractical for most startups on the blockchain.
If a startup runs an STO, it is 99% not exit scam.
Does STO Need KYC and AML
KYC and AML are mandatory when it comes to STO. If the project is based on the idea of anonymity and confidentiality, such a project is not viable. Sending an ETH from your wallet in exchange for tokens is simple, but going through a long KYC process is another thing.
The KYC check allows issuers to ascertain whether the US citizens are participating in the Security Token Offering. Selling unregistered securities in the United States constitutes a gross violation of obligations. At the same time, the issuer’s responsibility arises regardless of whether the issuer knew about the acquisition of tokens by US citizens. The only way to avoid this risk is to carry out a KYC check.
However, the main idea behind KYC procedures is to comply with AML/CTF requirements. This rule applies both to the US and EU.
STO and Regulators
The launch of STO means that it will have to work with existing laws on exceptions to the legislation on securities. The choice depends on the status of the documents, the available budget, and the amount of money needed.
For example, when operating in the US, there is the option Reg A + which is usually more flexible regarding who can invest. Though there is a ceiling of $50 million. There is also Reg CF (used for crowdfunding), which has a limit of $ 1.04 million over a 12 month period.
ROKKEX complies with Regulation D — an SEC regulation governing private placement exemptions. Reg D offering is advantageous to private companies because funding is faster to obtain and less costly than with a public offering.
ROKKEX Securities Exchange Platform will work within Estonian jurisdiction, that’s why we comply with Estonian laws.
All companies wishing to start an STO should know that they are under the authority of the regulators. Although they follow all the rules, there is no guarantee that regulators will not continue monitoring. There are still many important aspects that remain unclear.
For example, it is unclear how this proposal is taxed. There are many unanswered questions, including trade mechanics, design, fiduciary duties, and custody.
This is still a gray area. It is about doubt and uncertainty. At least the blockchain companies can be sure that they will set off rightly if they implement STO.
What Is the Legal Process of Launching STO
From a legal point of view, there are 2 events that should be followed.
- Since the security token must comply with certain regulations, be sure to consult with a team of legal advisers who can help you with the requirements of the legislation in different countries.
- For a cryptocurrency asset to be classified as a security token, it needs to pass the Howey test (the US projects only). The Howey test consists of 4 independent questions that must be executed to create a utility token:
- Is the fact of investment confirmed?
- Do investors expect to receive income from investments?
- Is money invested in a common enterprise?
- Is the profit generated by promoters or third parties?
In addition, tokens will be considered security if they pass alternative tests:
Reves’s Family Resemblance Test (the US projects only). If the issuer and / or their representatives manipulated investment expectations during the issue, sale or promotion of tokens, such tokens would be considered security. The term “manipulation,” according to the law, can be interpreted as you please.
Risk Capital Test (the US projects only). If a token can be called a risky asset, it is a security. Under the “risk” law implies the likelihood of not receiving the benefits for which the investor invested money in an asset.
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