Until a few months ago, the ICO (Initial Coin Offering) looked like it would be unstoppable. It had become the go-to means of raising capital for tech entrepreneurs wanting to fund their next venture. In the first quarter of 2018, ICOs had raised more than $6.3 billion from investors, surpassing the total of ICO funding in all of 2017.
However, the US Securities and Exchange Commission (SEC) and other regulatory authorities soon started to intervene. The problem is that when investors buy tokens as part of an ICO, they are often doing so in anticipation of future profits. Furthermore, the investor community around a project usually perceives their token ownership as a stake in the project itself. These dynamics can exist whether or not a project’s founders assert that they retain full ownership of their creation.
This difference in expectations has become a problem for ICOs. US Securities legislation uses the “Howey Test” to establish whether or not a transaction meets the criteria of being an investment contract. The Howey Test questions whether “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
While the SEC hasn’t yet introduced any formal legislation around ICOs, SEC Chief Jay Clayton has been unequivocal in his statements that ICOs should be treated as securities. Other regulators, such as the Swiss FINMA, have also established their position on securities offerings.
What is an STO and How is It Different from an ICO?
From this cloud of regulatory uncertainty came the Security Token Offering (STO). Essentially, the STO is an ICO that has dropped any pretense that it isn’t offering securities. Therefore, an STO attempts to comply with securities legislation based on the geographical location of its investor base. STO investors can be assured that they are purchasing equity in the company itself.
Unlike an ICO, an STO sale creates obligations for the issuer of the tokens and gives legal rights to the investor. Unlike an ICO, if the project flops and the company goes into liquidation, the STO investor stands a chance of getting some of their investment back.
Also, while the ICO has been mainly limited to a means of crowdfunding for startups, the possibilities for an STO could mean an established company simply tokenizes its existing equity instruments.
Finally, unlike an ICO, security tokens are not traded on unregulated crypto exchanges, but on compliant trading platforms. Because security tokens are a very new concept, some of these platforms are still in development. Coinbase has announced it will soon be starting security token trading, while NYSE owner ICE is launching a compliant trading platform for digital assets called Bakkt.
Regulatory compliance can impose different requirements on an STO depending on where the tokens are being offered to investors. Now that there are a lot of investors entering the blockchain space—especially in the far-East—many are looking to invest in STOs as they are an emerging trend.
Examples of STOs
There have only been a few instances of STOs so far, again because the process is nascent. Blockchain Capital was one of the earliest pioneers. The company is a venture capital firm and raised $10 million within six hours of opening its STO earlier this year. The proceeds were transferred into one of the firm’s venture funds. Science Blockchain is another example, having raised $12 million for its incubator and fund focused on blockchain investments.
Sia is a blockchain-based cloud storage platform, with an STO that is currently ongoing. The Sia platform operates two coins, the Siafunds coin, which is being sold in the STO. Users of Sia cloud storage will transact in the Siacoin as the utility token of the platform.
Setting Up an STO
To be successful in the STO space requires expertise, particularly so given that the concept is still in its infancy. Launching an STO is a completely different approach and is subject to much more scrutiny than an ICO—especially in terms of legal frameworks and tokenomics, since each token represents a security.
Moreover, regulation is still unclear in many jurisdictions around the world. Therefore, investors and regulators analyze these projects much more rigorously. For this reason, it is critical to partner with the right team of advisors to help navigate the process.
Priority Token is an international STO and ICO advisory agency with offices in London, Singapore, Moscow, and Seoul. They are the #1 STO agency and within the top 3 ICO agencies with significant experience in fundraising for utility and security tokens along with raising venture capital.
Furthermore, Priority Token has a huge investor network in Asia (China, Korea, Japan, Hong Kong, and Singapore) and performs roadshows for their clients almost every month. The company has been involved in projects raising more than $200 million in funding and can provide a full suite of advisory services including competitor benchmarking and direct promotion to private investors.
x10 is a full-service marketing and PR agency covering STO and ICO promotions. The company can provide tailored services including targeted marketing for specific geographies alongside support from writing whitepapers all the way through to exchange listings and post-ICO services. x10 is fast-growing and is rated among the top five ICO marketing firms on Hackernoon.
CrowdfundX is a fintech marketing firm specializing in ensuring US regulatory compliance (Reg A+, Reg D 506 (b) and Reg D 506 (c)) for STOs. The company can also help with acquiring retail and institutional investors.
IBC Group is an international blockchain consulting group spanning 40 countries. The company can facilitate end-to-end ICO and STO support, enterprise blockchain development, capital raising, consulting and institutional training.
In light of recent developments in the blockchain space, there is no doubt that the industry is heading towards an STO-predominated future. While ICOs introduced an excellent means of crowdfunding for startups, STOs are poised to further enhance these fundraising opportunities while introducing new investment dollars into the space —including potentially game-changing institutional contributions.