Security Matters: STOs Paving the Way Forward for Crypto Funding
If 2017 marked the meteoric rise of the ICO, then 2018 may be the year of its fall.
In recent years, ICOs opened up a new channel for companies to quickly raise significant capital from the market. However, due to the largely unregulated nature of ICOs, many have questioned the ecosystem for being plagued with fraudulent activities, and funding for ICOs have continued to hit new lows.
But all is not lost. Far from it.
The STO, the regulated form of crypto funding, is being welcomed by many entrepreneurs and investors alike as the next logical step in using blockchain and distributed ledger technology (DLT) for responsible, accountable crypto funding.
Offering by the books
An STO or security token offering, as the name suggests, requires it to offer some kind of security to the investor in the form of ownership in an asset that is liable to government laws and regulations, just like the sale of traditional securities.
At first glance, an STO is like an ICO, where a company makes an offer to the people to purchase a blockchain-based token, but whereas an ICO is essentially a promise that a token will have some kind of utility, an STO must comply with securities regulations and have its value backed by tangible assets like banknotes, bonds, stocks, equity, or real estate.
So, compared to an ICO, an STO is regulated and can minimize the possibilities for fraud, making them much more legitimate for real world investing.
STO = Security + Token + Offering
A security is an ownership position in tangible assets like debt securities, equity securities, and derivatives; those assets can also be antiques, real estate, time-based rental, credit, private equity, ownership of a business, human capital, creative productions, or natural resources.
A token is a paperless, blockchain-based representation of an asset, where the blockchain uses distributed ledger technology (DLT) to keep verifiable and permanent records of token transactions between two parties.
An offering of tokens can be made by a company on a government regulated exchange ; in the U.S., an STO will need SEC (U.S. Securities and Exchange Commission) approval by complying with Regulation D, A, S, CF, or other applicable regulations. The investors will be subject to KYC (Know Your Client) and AML (anti-money laundering) which require them to provide information about their identity for verification.
The Howey Test
In July 2017, the SEC released a report stating that according to the Howey Test, the blockchain-based DAO tokens were essentially securities under U.S. law.
The Howey Test was created by the U.S. Supreme Court. According to the test, a transaction is an investment contract if: 1) there is an investment of money, 2) the investment is in a common enterprise, 3) the buyer expects to profit, and that 4) the profit comes from the efforts of others.
Based on the test, the SEC determined the DAO tokens were investment contracts, which would be subject to the Securities Act of 1933, the Securities Exchange Act of 1934, and various registration and reporting requirements.
This meant that all other token projects could also be subject to regulation under U.S. securities laws.
Security tokens are the future
Security is a fundamental aspect of real world investing, and ensuring everything is run properly is important in any exchange. As Binance founder and CEO Changpeng Zhao recently pointed out, for the industry to move forward, security is paramount.
For blockchain-based investments to become more widespread, there would need to be more regulatorily sound choices for the regular investor of today. STOs can provide those choices because they comply with the existing regulatory frameworks for traditional assets, and more importantly, they can bring to the table the many benefits of being a digital asset.
For many startups and new enterprises, STOs present a fast, powerful and very viable alternative to traditional fundraising methods. From late 2018 onward, STOs are expected to become the most widely adopted form of crypto funding.
The LeadBest team has been providing blockchain and smart contract technology services to assist enterprises through all stages of token issuing (ICO, STO, stablecoin, real estate tokenization), private equity fundraising, token distribution, and asset management. The team specializes in providing one-stop solutions that fully cater to the needs of clients in the “funding, investment, management and exit” primary market cycle.
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