Since cryptocurrencies have been introduced to the world, companies started practicing a new unique method of investment attraction — Initial Coin Offering. Such a campaign doesn’t involve any legal liability, so ICOs can leave the market suddenly and lose investors’ trust. However, the history of token crowdfunding doesn’t end here — it’s to be continued.
Today, ICOs are being replaced by the new generation of crowdfunding campaigns — Security Token Offerings. Such projects solve many legal issues and offer coins with real value. So, let’s go STO?
Why the era of ICO may soon be over?
The last quarter of 2018 marked a massive failure of ICOs: investors disappoint in this tool of venture capital financing. There are several reasons for that:
- profit reduction for ICO contributors
- lack of transparency from teams and ICOs
- blockchain is being introduced into the traditional market too slowly
- absence of outstanding ideas from project teams
According to Statis Group report, published on Bloomberg: since 80% of ICOs appear to be scams, investors are getting more cautious and experienced. Or, probably, they’ve run out of money.
O. Just an ‘O’ to make it look cool. Heh, see it?
Since contributions in cryptocurrency aren’t controlled by banks and third parties, ICO investment is a risky venture. If a company declares bankruptcy or simply disappears, investors will never get their crypto tokens back. Luckily, the situation can change to the better thanks to STO.
In July 2017, U.S. Securities and Exchange Commission (SEC) has published a report claiming that most tokens should be classified as securities and, consequently, be the subject to the corresponding regulations. This claim was supported by other regulators, too. While 2017 was fruitful for ICOs, in 2018, investors started taking more informed and thought-through financial decisions and switched to STOs (Security Token Offerings) instead. It’s nothing to be sneezed at!
What security tokens are, and why they’re security?
Let’s start with term definition. According to Wikipedia, “Token money typically represents the promise to be exchanged for something of value in the future. Token money can exist an account record rather than physical form”.In layman’s terms, this is digital money that has value in some certain ecosystem.
Tokens are divided into two types:
- utility tokens
- security tokens
If you have already dealt with blockchain projects, you must know what utility tokens are. A utility token is a currency of a project based on Ethereum or any other blockchain platform like Waves, NXT, EOS. This currency is used to access some privileges within the project ecosystem (its website or a mobile app).
Typically, tokens are used to buy some services, for instance, cloud storage, access to applications, or as a payment for items and features within some platform.
On the opposite, a security token doesn’t have any certain function or sphere of application — instead, it represents a share of the company that’s emitted it. A security token gives owner the possibility to get a company share or its dividends, to participate in capital management, and so on. That’s why the purchase of security tokens is often compared to that of shares on a traditional stock market.
Although security tokens play the role of security papers, SEC doesn’t hurry to grant them any legal status. In the future, security tokens might become a cryptocurrency alternative to the traditional stock market.
In short, the main differences between utility and security tokens boil down to one simple fact:
Security tokens are much more heavily controlled by the government than utility tokens.
Is it good news? For ICO owners, it only means additional legal and financial hindrances. For investors, it guarantees a perfect transaction speed and legal protection. Experienced ICO investors value STO for the transparency of the trading process and decent protection against frauds. Unlike ICO teams, STO cannot just disappear taking investors’ money and get away with it.
Types and features of STO
What makes STO different from ICO is the fact that such campaigns aren’t available to everyone: STO investors have to comply with certain demands. According to SEC, an individual investor should have a certain minimal annual income ($200,000 for one person, or $300,000 for both spouses), and a financial organization should possess physical and digital assets worth at least $5 mln altogether. Alternatively, there is an exemption regulation STO: all investors can participate in such campaigns because accreditation isn’t obligatory. However, such STOs have to deal with limits on the crowdfunding cap, for example, a project cannot gather more than $1 mln per one year.
According to USA legislation, a project can attract investors in two cases: if it’s registered in SEC, or if it’s not a subject to taxes according to the Securities Law. How do these two types vary?
- Regulated STO provides token holders with all possible rights. Once SEC examines and approves a project, all legal risks draw to a zero. Registered projects enjoy the whole gamut of advantages. For example, they can work with both accredited and non-accredited investors, publish advertisements, use instant exchange services, and have a limitless crowdfunding cap. However, the process of STO registration is too time-consuming (takes about 12 months), expensive, and involves enormous paperwork.
- Exemption regulation STOs have some legal restrictions. First, they’re available for accredited participants only. Secondly, purchased tokens stay blocked for up to 12 months which affects their liquidity. Thirdly, such projects have to comply with blue sky laws — that poses additional problems. Yet, despite all complications, organizing an exemption regulation STO is still easier than going through the official project examination by SEC.
Why STO is better than ICO?
Safety and reliability are the main advantages of STO. When an ICO disappears with investors’ money, no one can compensate the victims’ loss because such projects are not legally regulated. STOs have to comply with strict legal demands to exclude the risk of them being financial frauds, Ponzi schemes, casinos or bookmaker’s offices.
Thus, when you buy security tokens, there’s a very low possibility of losing your money. Besides, security tokens can equal traditional shares, which gives owners additional investment opportunities.
Dangers and risks of STO
Ready to participate in STO? Don’t hurry: as we’ve mentioned, investors also have to comply with a few requirements. If you want to donate the last money from your piggy bank hoping that a token will make it to the top in a couple of years, STO is beyond your means. Here, people play for the high stakes. First, the minimal investment sum should be around $10,000 (check out STO project requirements). Secondly, you should manage your investor’s rights wisely to double the riches.
To top it off, STOs aren’t devoid of risks. Although such projects claim to have rock-solid legal security, they also can be discontinued due to compliance issues. Before you invest your hard-earned bucks, figure out whether the project is truly accredited by SEC. Precedents with company shutdown have already taken place in the USA.
Thus, SEC took measures against Munchee and AriseBank ICOs (no ad intended): it made companies cease the crowdfunding campaigns and register their practices. Sometimes it’s token holders to get the ball rolling and file a suite. Such situations have happened to Tezos, Centra Tech, and ATBCoin.
Therefore, an investor can contribute to an STO that will be closed or ceased due to non-compliance with rules and regulations revealed after the registration. According to statistics, the market isn’t ready for STO yet: four campaigns launched in October 2018 turned out to be a complete failure. One popular project — Neluns — appeared to be a scam. Its official website contained false information about accreditation, and it never really passed SEC’s examinations.
ICO won’t survive through the STOrm
While blockchain is evolving, investors are growing, too: they start taking wiser decisions and analyzing the projects they want to invest in. ICO will gradually lose its authority because no one wants to pour money down the drain. ICOs have a lot of drawbacks:
- They aren’t reliable. Theoretically, any crowdfunding campaign can be finished successfully after which the team simply disappears with the money raised. The victims of the fraud won’t be able to take any legal measures and get their money back.
- Ownership of utility tokens doesn’t provide investors with the same rights as security tokens do. Besides, utility tokens don’t have any real value until they get enlisted in exchange platforms. Not so many ICOs manage to reach this development stage.
- STO projects have a higher chance of getting support from serious investors and companies than ICOs. That means STOs have a higher potential.
Despite the fact that STO projects have appeared not so long ago, they already get support from both traditional exchange platforms, (for example, NYSE), and cryptocurrency exchanges, such as Binance. Other platforms planning to launch STO token exchange include:
- Gibraltar Stock Exchange (GTS)
- Malta Stock Exchange
- Australian Stock Exchange
- London Stock Exchange
Special security token trading platforms are also being launched: tZero and AspenCoins are the pioneers in this sphere. Alternatively, there’s a cloud blockchain platform called Token IQ. It allows tokenizing real user’s assets.
Aside from, it, there are some companies that help projects go through KYC/AML (client personality verification) procedures and implement SEC compliance practices. The most popular examples are Securitize, Harbor, and Coinlist. Such projects as Vertalo, Prime Trust, VerifyInvestor, IdentityMind specialize exclusively on legal help for STOs.
However, it’s too early to say that STOs are close to solving all the market regulation issues. Although, STOs are considered to be suitable for all regulatory requirements, indeed, they haven’t get “full access” from the supervisory authorities yet.
Our team supposes that the STOs, obviously, will be the significant trend of the following year, sooner or later STOs will conquer the market because they deserve trust and attention of serious investors. Stay with Luntik and look forward to more interesting articles, even we write not so frequently…
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P.S. We are not affiliated in any way with any project mentioned above. All the information provided in this article is subjective and represents the vision of Luntik’s team only. Do your own research… Oh c’mon, we’re not even touching anything serious here doe.