Security tokens versus utility token private-sales

The long version of this article was published first on LinkedIn on 8/28/2018. The crypto market is evolving rapidly. Check our latest articles here or on our blog for our most recent perspective.

The private sale has heavily taken over the ICO space for dApp ICOs, leaving crowdsales in the dust. The reason for this massive shift, is a result of the evolution in token sale regulation, and the lack of clarity for it.

What is a security token?

A security token represents a resource that is tied to a tradable asset, such as shares in a company. Even if a token isn’t intended to be a security, if its value changes based on the company’s performance then it falls under the regulations of one. Security tokens constitute investment contracts. The contributor buys them in anticipation of future profits. They are built by tokenizing an asset in the company such as equity which grants voting rights or dividends. However, token sale regulation in the U.S. is a grey area, despite the amount of laws currently surrounding it.

Why do traditional investors like security tokens?

Traditional investors are attracted to security tokens because of their similarity to equity. In addition, there is less uncertainty in the private sale than in crowdsales, because of the limits it imposes on who can purchase the tokens. The development of the security token has created a new breed of crypto investor as a result of this. As more traditional investors enter the crypto space, for many ICOs are reaching token soft-cap or hard-caps in the private sale alone. If this trend continues, most successful ICOs won’t even need to consider crowdsales for funding their project.

Unfortunately, the regulations set by the SEC have caused utility tokens to exist in a limbo of legal uncertainty. The precedences that have been set have come from subpoenas, and are guiding the current understanding of utility token regulation.

Why are security tokens more popular among traditional investors?

One of the main reasons traditional investors flock to security tokens while veteran crypto buyers, whales and hedge funds are considerable wary of them, is that once the tokens are released, they will not be able to be traded until the vesting period has ended, since there are no security token exchanges. However, traditional investors are interested in them because of their similarity to equity, but with faster returns.

It is predicted, by many industry experts, that by 2020, STOs will be as five times larger in the market than in 2018. Security tokens are a quickly growing business, and all signs point to them being here to stay.

Click the link to read our full guide, ‘Security tokens versus utility token private-sales.’

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