During 2017 and 2018 the SEC (Security Exchange Commission) enforced over a dozen actions against digital asset offerings or ICOs because they were suspected of fraud, wrongdoing against investors, or failure to comply with securities laws. The fact that ICOs and their reputation took major hits during these past few years is nothing new. So what’s the lesson learned from all of this?
ICOs first became popular because it’s a simpler and more convenient way to fundraise a new company venture. Leaving scams and get-rich-quick schemes aside there are promising factors that put these kinds of offerings at an advantage over traditional IPOs or even Investment Banking.
Now, as we go into 2019 it’s starting to become apparent that companies and businesses are looking at the concept of Security Token Offerings (STOs) for their funding needs. In fact, comparing Q2 and Q3 in 2018 STOs saw a steady rise of 1.66% in the number of projects offering a security token while the number of projects offering utility tokens decreased by 10%. This is not random. Coming up next, we analyze the reason why STOs are becoming increasingly popular and how it could mark the ending of investment banking as we know it.
A new solution for an old problem
Investment banking is a term used to describe the financial activity of helping out companies issue stocks, securities, and other similar financial assets. These entities basically serve as middlemen between investors and a company when it wants to issue securities such as stocks or bonds.
In the traditional non-tokenized assets world the investment bank helps out with pricing securities and also advises on how to meet regulatory requirements. STOs, on the other hand, are the tokenized equivalent of stocks. These token sales represent a fully compliant security issuing mechanism through the generation of tokens on a blockchain which are sold directly by the business or organization looking to raise funds for their operations. Even though both are viable options for a company to choose from when considering to hold their own fundraising campaign we are seeing more and more businesses opting for STOs.
So, what’s making giant firms such as Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch and Deutsche Bank to be completely removed from the equation?
The benefits of STOs are abundant
Startups and tech businesses often have a similar mentality: lean works best. For experts in new alternative investment and funding campaigns like Anton Dzyatkovkiy, Co-founder of Platinum, a leading enterprise in organizing STOs and even Initial Exchange Offerings (IEOs), the former poses more benefits than regular Initial Public Offerings (IPO) or any other financial instrument where investment bankers would act as brokers.
A notorious benefit is that STOs have a lower barrier of entry. For companies considering either an IPO via the help of investment banking or hosting an STO, it is vital to comply with legal frameworks of securities. The main difference here is that fees are far less for STO organizers than paying broker and investment banker fees. Most established companies have a better reason to choose an STO for a funding campaign because it has the potential to unlock liquidity. It can also bring new investors on board who are looking for a chance to support existing business. ICOs on the other hand, may not pose as a viable option due to uncertainty, and neither would the same companies do an IPO due to the complexity and the cost of using investment banking and other broker services.
Another wake up call for investment banking is that STOs are not tied to a specific and only country. IPOs are normally thought out as in a company doing an IPO in the United States. This virtually restricts anyone without a brokerage account or representative in the United States from participating. While STOs, in comparison, can be open to multiple countries at once. Participants only need to sign up and have their accounts with the security token platform issuing said token. Even though some still have exclusions and country-specific restrictions it remains way more open than any other financial product investment bankers can provide.
Going digital with security tokens is not just a gimmick. It comes with inherent advantages. According to Polymath’s Trevor Koverko “You can program a token, but a static share certificate just sits there and collects dust”. This means it has advantages that can be programmed and coded into a digital token to make it fully compliant with any, literally any, legal requirements. Should these security tokens have a vesting period? Any transfer restrictions? You name it. If you can think it, then it can be done. This makes post-offering stage administration of securities way easier and less costly. And it even makes it more transparent for all participants.
A new generation of investors embraces STOs
Lastly, investment banking — like it or not — is old news. It’s been around for what seems to be ages away. As we move forward with a world of digital solutions and removal of unnecessary intermediaries, it also brings an effect of novelty to more and more people. Maybe some investors never even considered participating into an IPO, in fact, only 1 in 3 millennials have investments in the stock market, but these same individuals can be attracted more to buy and own security tokens because of their simplicity and technology. We can even choose to own fractions of tokens, which is allowed because of its code. This lifts any type of investment amount limit that smaller investors would have trouble meeting. And for STO organizers it means more potential investors coming into their funding campaign.
As very graciously put by Anton Dzyatkovkiy, Co-founder of Platinum, a global company providing a full suite of services for STO, ICO, and IEO: “Financial giants such as JPMorgan now have to make a decision on how to join the Security Token movement. They can either adapt or be left out.”
Patrick Byrne, chairman, and chief executive officer of Overstock.com also weighing in on the invention of Security Token Offerings believes “It is a very clever offering, and could represent a whole new model for American entrepreneurship.”
If anything, STOs are chock full of promises to revamp financial and investment products as we know them today. Starting out with investment banking and finalizing with IPOs this new trend is something you should be in the lookout for. It certainly will be something today’s investment bankers will have to be following extremely up close either because they like it or not.
