What You Didn’t Know About Security Token Offering
By Mina Krzisnik, fintech lawyer on ALTCOIN MAGAZINE
Security token offerings (STO) are cryptography tokens used by companies to raise capital from investors for a variety of reasons. By offering STOs to potential investors, these companies prove that they are committed to their business and are confident that these proposed businesses would deliver amazing returns.
Throughout the US, these tokens deliver securities to investors. Section 2(a)(1) of the 1933 Securities Act states in part that “transactions that qualify as investment contracts are referred to as securities”.
These securities include payment of dividends to the token owners, entitlement to a share of the company’s profit and payment of interests, among others. All these provide a safe investment means for investors who believe in the company’s future but are wary of future unpleasant circumstances.
The first STO, which raised $10,000,000 on a single day, was carried out by Blockchain Capital (BCAP) on April 10, 2017. STOs have been projected to experience a growth of up to $10 trillion by 2020.
A security token, gotten usually from STOs is the same as conventional security. The difference, however, is that ownership of this tokens is conducted and conferred over the blockchain transactions, which does not require the need for third parties nor a need for the two involved parties to physically meet and discuss. This is made possible by the use of “smart contract” feature of the blockchain technology.
More explicitly, below are some of the rights and rewards security tokens make available to investors who buy them:
These tokens are cryptocurrencies which can be used as a medium of exchange both on and outside the network.
These security tokens as a means of payment for permission to use certain functionalities on the platform.
Security tokens with features of certain functions can allow the owners of these tokens to perform some functions. These could include functions like allowing token holders to advertise their products and/or services on the network.
By acquiring these security tokens, especially those equipped with this feature, token owners will be granted certain rights on the platform. These rights could include voting and/or revenue distribution, among others.
These security tokens are assets that have and create value on the blockchain network. Because these have value, these tokens allow buyers and sellers of these trades on the network. These tokens can also be used to help govern rewards when certain tasks, like successful cryptocurrency mining, have been completed.
Benefits Of Security Tokens And STOs
Asides the rights and rewards these tokens make available to token owners, other benefits can be gotten from them. These include:
The fact that STOs are made to be regulations-compliant confer on them the attribute of credibility.
While there are regulations that regulate the STOs, these regulations do not limit these security tokens.
Because the investment process can be conducted over the internet, more investors can be reached to invest into your business; irrespective of their geographical location.
The presence of free markets, as well as a relatively high number of investors on these STOs, reduces the potential for industrial manipulation to occur.
These security tokens are programmable and can be made to act in a certain type of way.
These tokens can be used in trade exchanges, as well as they in token trade. These trades can be done at any time of the day, without any unnecessary lag period.
How Are STOs Regulated?
To better control the security token market, as well as the traders here, there are regulations that STOs must adhere to. In the EU, STOs are either regulated separately (like in Lithuania or Switzerland), or the regulators took a case-by-case approach.
US law regulates such STOs in Section 2(a)(1) of the 1933 Securities Act states, in part, that “transactions that qualify as investment contracts are referred to as securities”. Before a cryptocurrency token can be accepted as a security, it must pass the Howey Test. This test and the final verdict of whether or not a token is a security token is as a result of the 1946 case which involved Howey vs Security Exchange Commission, SEC.
According to Howey’s Test, a transaction can be termed as an investment contract, and by extension, security, if:
- It is an investment of funds like assets, capital, cash, goods, services, and/or a promissory note.
- There is an expected profit to be made as a result of the investment.
- The investment is a common enterprise. That is, it involves more than one investor.
- The profit comes from the work efforts of other people.
In addition to this, if the investment’s profit is partly or totally outside the control of the investor, then the investment is said to be a security. If this is not the case, and the investor can influence the management of the security, then it is not regarded as a security.
The SEC also requires that all offered securities must be registered with them. The registration process usually involved the disclosure of certain information. This information includes:
- A description of the business purpose and properties of the organization.
- A description of any security on offer.
- Management details of the company.
- The company’s financial statement, certified by a non-interested, third party independent.
Difference Between STO And ICO
Both STO and Initial Coin Offering (ICO) are means by which business owners get fund by their business through the sale of tokens. This, however, seems to be as far as their similarities go.
- STOs’ emergence has been said to be a means by which the gaps left by ICOs are filled. These gaps are stronger regulations, which seem to be largely lacking in ICOs, and separation of speculation from the utility. While this speculation is done mainly by token traders who are mostly interested in profits, the utility is carried out by investors who use these tokens as a medium of exchange in or outside the platform.
- Due to the regulations required for STOs, there are limits on the number of people who can invest in it. Unlike the case with ICOs where there are no legislations, hence, no limits.
- Security tokens are termed “securities”, and people who invest in these are protected by certain legislations, tokens from ICOs do not have these benefits.
- STOs have underlying real assets, ICOs do not, and hence, they have no monetary value.
- STOs value is created when the company is run efficiently, while that of ICO is generated from the technology used on the platform as well as price volatility.
To Wrap It Up
STO and ICO meet different needs and cater to different people. After careful consideration of the aforementioned, the choice of which to go for ultimately lies with the investor.
Originally published at https://www.iuricorn.com on September 24, 2019.
