By the end of 2017, ICO has become the primary way to finance blockchain startups. Despite the popularity, most investors are well aware of the rather severe shortcomings of this model, which allows them to raise money for innovative projects.
Here Is A Brief Guide to Security Token Offerings (STO)
The lack of a verification mechanism for companies conducting ICOs makes investing in Russian roulette. Why do people agree to give money, not being quite sure that they give it to no scammers? The main reason is the low entry limit.
No need to invest large amounts. Since the placement takes place online, the number of potential investors is significantly higher than, for example, with a traditional IPO, and the minimum investment amounts are lower. One thing is that you risk losing $ 50,000, another – $ 100. The insignificance of the number of possible losses weakens the sensitivity to risk.
The main problem of ICO, however, experts believe is not that there is a large number of fraudulent schemes among them, but the fact that many tokens being sold are in fact, shares. Therefore, they violate the laws, according to which the circulation of shares must comply with specific rules.
Shares are related to the property of the company that issued them. They give the right to manage the company and secure the ownership of part of its property. Also, the shares are entitled to receive dividends. Stock tokens are the digital incarnation of traditional stocks.
The utilitarian token provides an opportunity for future access to the company’s products or services. In this sense, it is not an investment product, since it does not involve expectations of regular income or an increase in its price. In most cases, it will be possible to sell it later on a cryptocurrency exchange and get some profit, but owners of utilitarian tokens have no rights or shares in the property of the issuing company.
Usually, the so-called Howey Test, a standard test for determining an investment contract, is used to determine the nature of the token in the United States and many other countries.
To be considered an investment, the sales contract must meet two basic requirements:
The buyer invests in assets and expects to receive profit from them in the future;
A third party generates any buyer’s advantage.
Theoretically, if a token meets these requirements, it can be considered a share. However, regulators in different countries still have problems determining the nature of digital assets. These problems are related to the fact that they do not look at the purpose of the release of tokens, but on how they are used in reality. However, in reality, the majority of ICO participants view it as an investment asset with a limited offer and expect an increase in its price, including during trading speculation on the stock exchange after the project implementation. This circumstance confuses all cards because issued as buyers consider utilitarian, tokens as an investment. TIt was clearly stated recently by Jay Clayton, head of the US Securities Commission: “All the ICOs that I know of are investment projects and therefore violate the laws governing the regulation of the securities market.” Knowing this attitude to ICO in the largest financial market of the planet, many projects stopped selling tokens in the United States.
Anyone who can effectively solve the problem of tokenization of securities will become fabulously wealthy. The current market for tokens of several billion dollars is just a drop in the sea of traditional investment assets that can potentially turn into digital form. It has already become clear that ICO is only the first step towards the transfer of financial markets to blockchain technology. Despite all the problems and imperfections, the popularity of ICO demonstrates the willingness of traditional economic structures to modernize.
The new model will not have to contradict the existing laws governing traditional stock markets, especially concerning the safety of investors and the companies themselves.
Many experts believe that issuing digital shares will require less cost and will be more effective than ICO. If the regulators increase the pressure, then the risk of paying huge fines for violating the law may be so high that it completely turns off the desire to hold an ICO, at least in the USA. On the other hand, many companies that have already conducted an ICO are doing everything possible so that shares do not recognize their tokens.
They know that in this case, the tokens issued by them will be subject to numerous restrictions, including the characteristics of investors and the exchange procedure, which will significantly complicate the further development and modernization of the launched project.
All this testifies to the fact that the existing legislation requires individual adjustment for digital assets, which takes into account the technological specifics of most projects.
An essential step towards bringing together the interests of regulators and technology companies was the emergence of platforms that allow for STO (Security Token Offering). Inform, this accommodation is close to the ICO. The investor buys tokens, sells, or stores them. However, in content, these tokens are investment assets, since behind them, as in traditional stocks, is the ownership of companies or their profits.
Before the announcement of the placement of tokens, companies undergo procedures that allow them to comply with the requirements of KYC (Know Your Client) AML (Anti-Money Laundering), existing in any jurisdiction. Besides, companies must go through the traditional IPO registration procedure. That is why tokens fully comply with legal standards.
The tokens produced using the STO platforms can limit the range of customers to the framework determined by the law of a particular country. If a specific buyer cannot legally acquire an investment asset, tokens will not be sold to him. Technologically, this is done using smart contracts and an address recognition system.
STO tokens allow their customers to exercise the rights held by their owners.
The platforms on which STO is held are also a trading platform of tokens. It allows you to monitor compliance with statutory rules. Only authorized participants are allowed to bid.
STO technology allows you to automate the verification of the legal purity of the investment transaction.
Thus, STO tokens combine mobility, democracy, and cheapness of ICO tokens with the legality, security, and rights to a part of the assets of companies inherent in traditional shares.
Read more, What Is The Future Of STO and ICO in 2019?
Since the beginning of 2018, three major projects for the production and trading of tokenized shares have been launched.
In February 2018, the Canadian Stock Exchange (CSE) announced the launch of a platform for processing of operations with securities operating on the ECH blockchain. The tokens issued based on the platform will fully comply with the requirements of the legislation on securities. Both proven companies and those seeking to obtain external funding for the first time will be able to participate in the platform. At the preliminary application stage, it is required to obtain the consent of the Securities Commission. Using the blockchain will allow bidders to close deals almost immediately instead of the usual two days. According to the executive director of CSE, Richard Carleton (Richard Carleton), the launch of the new platform “will turn the trade in tokens from a pirate enterprise into a stable and legal business.”
Prometheus launched in March 2018, a combined blockchain-platform that allows you to perform all types of transactions with tokenized shares and tokens according to the rules of regulators. Includes financial services, brokerage infrastructure, investment security checks, and exchange platform. Ember’s token of the platform ensures the operation of the system and is the basis for issuing digital shares and their further circulation in the secondary market.
Polymath is the platform that allows you to issue and trade tokenized shares. Works on smart contracts Ethereum. Polymath’s marketplace will be the meeting point for digital promoters and investors. The security protocol provided by the algorithm complies with the requirements of the law. Only authorized participants are allowed to trade. The project has already attracted more than 50,000 investors and received bids from more than 20,000 companies for the tokenization of their shares.
Trevor Koverko, the founder of Polymath, is confident that by 2020 the market capitalization of STO tokens will be at least $ 10 trillion. Even taking into account Koverko’s interest, his optimism seems to be very reasonable, because it is supported by the rapid growth in the number of platforms offering STO release.
About the author Melisa Marzett is a freelance writer working for www.essay-editor.net and having many interests. Among the fields of her expertise are a sport, fashion, movies, literature, theater, traveling, handmade, and cooking.
As we move forward into the crypto age, many new terms keep emerging and introducing themselves to make things more interesting for us. Security Token Offering is one of the latest of these crypto terms. Let’s find out more about it here.
Security token offerings, or STOs, refer to the process of selling security tokens in exchange for investor funding for a new project.
The security token industry, even though still being in its early phase, is growing at an unprecedented rate. STOs are quickly becoming the business model of choice for businesses looking to raise funds via blockchain-based crowdsales.
However, there are still many questions that both investors and business owners keep trying to find answers to, like how security token offerings work or how they are better than ICOs.
In this article, we try to answer some of these questions while explaining in detail the concepts and the process of STOs. If you want to know the STO development process then you should visit this
Security tokens are blockchain-based digital currencies that acquire value from real-world financial assets such as shares, bonds, real estate, etc. By holding security tokens of an issuing company, you’ll essentially be owning a part of the company. STO investors and token holders are also given profits in the company revenue in the form of dividends, interest or value increase.
It is crucial for a security token to pass “Howey’s Test”, which is a special compliance test developed to determine whether a particular digital transaction can qualify as an investment contract. Only the tokens passing the Howey Test are considered security tokens.
What are security token offerings?
A Security Token Offering (STO) is a type of crowdsale held by a private or public company to raise money in exchange for security tokens.
The primary purpose behind an STO or the launch of security tokens is to raise money for a new project or startup. STOs have emerged as an improvement over ICOs, as a more logical, secure and regulated fundraising alternative, providing startups and entrepreneurs with a new source for capital money.
The second and less-common use of security tokens is for the tokenization or digitization of physical assets such as real estate and bonds. This is, in fact, a great potential opportunity for this industry, as the overall value of the world’s physical assets (real estate and equity assets) goes well beyond $300 trillion.
One of the primary reasons why security tokens are becoming a common choice of both the investors and companies looking for investment is their compliance with the SEC norms, which cannot said for utility tokens which are unregulated by nature. Security tokens are powered by blockchain technology and backed by actual assets, which make them more liquidate than any other type of cryptocurrencies.
Besides being far more liquid as compared to both utility tokens and traditional securities, security tokens are also automated, which means they can be designed to automatically make payments of investors’ dividends using the underlying smart contract.
Being a secure and compliant digital security, these tokens can be used to literally represent any kind of real asset of value. The general adoption of security tokens will remove much of the paperwork involved in the management and trading of physical securities along with the high cost of administering the existing financial systems.
Security token transactions are faster and easier, as all of the compliance terms can be coded into the smart contract itself, which can also ease and speed up the transfer of ownership in case of fractionalization of real assets.
Security tokens employ blockchain’s cryptography along with smart contracts which are very secure by nature. It is virtually impossible to bypass blockchain’s security standards.
These tokens can make the security transfer and exchange process much easier, faster and cost-effective while protecting investors and companies against fraud, increasing the overall efficiency of trading.
When someone is looking to buy or invest in security tokens, they have the following two options:
An STO is more or less similar to an ICO, except for the type of token being traded. If you are looking to buy security tokens, you can participate in an STO of a credible project/company.
Purchasing security tokens via an STO is rather simple. All you have to do is register for the sale on the official website. Then, you can select the number of tokens you wish to buy and make the payment to confirm the purchase.
In most cases, your tokens will be backed by real-world assets such as the company’s shares or stocks and give holders specific rights such as voting rights and/or profit rights in the issuing company. Make sure to check them out before buying.
If you’re planning to launch your own security token offering, you must be wary of many things, including the regulations and legal requirements of security tokens, the best time to launch an STO, your target customers, the best countries for STO, and the launch process.
Different countries may have different laws and regulations regarding security token offerings. Make sure to check the security regulations of your target jurisdiction as the first step. For instance, the US has the following three regulations for security tokens:
Moving on to the next prerequisite, you should analyse whether STO is the best option for your company or startup. For one, your company or project should be big enough and have an expected revenue target of $10 million, if not more.
Some of the best countries for launching your STO are – Malta, Estonia, Canada, Germany and Switzerland.
The next step is to create and release your security token which you would be exchanging for investors’ money. The best option is to use any of the registered security offering platforms, such as Harbor, Polymath, etc.
The process of creating a security token via any generic platform will include the following steps:
Step 1: Create an Account
First of all, you will have to create an account on the security token platform through which you want to build your own token.
Step 2: Fund your wallet
Upon signup, verification and sign in, you’ll be asked to link your Ether wallet to your platform account. Once you’ve done that, you need to fund your wallet, according to the rules of the platform.
Step 3: Register your token name & symbol
The next stage is registering a name and symbol for your security token, which you can do from your account dashboard.
Step 4: Select the Partners/Advisories
After you make the payment, you can then select the partners, advisors, legal help and marketing team that you may need for assistance with your STO project.
Step 5: Create your security token
Once you’ve completed the initial stages, you’re all set to build your security token. Don’t worry, you do not have to code or anything. Just enter the additional details such as the STO website address (if any) and click ‘submit’ to create the token.
Step 6: Setting up your STO
Once your token is created, the next step to set up the STO. For this, you need to select details such as the number of tokens you wish to sell, price per token, STO schedule, acceptable cryptocurrencies, etc. Once done, you can confirm and launch your STO.
Creating your own security tokens and launching your security token offering are probably the best things you can do today to raise funds for your startup or new project. The process of building a security token and setting up an STO is quite easy, as explained above. You can seek the help of any of the popular security token platforms for the purpose. Security tokens may not have a very impressive market sharing as of today, but they hold immense potential and will observe a systematic growth in 2019 and years to come, as experts predict. It is the best time to launch your own security token offering.
A STO is a secure way to increase the funds for a new cryptocurrency startup which will be resulting great benefits of investing in STO. In the process, the percentage of the cryptocurrency is available on offer to initial supporters in terms of transfer of cryptocurrencies or legal tender.
Before offering STO, the company releases a white paper mentioning about the project, objective, money required to undertake, type of money accepted, time duration of STO campaign, virtual token kept with them, and objectives to be furnished by the project when it completes.
These coins are called tokens which are just similar to a company’s shares to investors in regards to IPO transactions. If the collected money from the STO is not sufficient to meet minimum money requirement, the money is transferred back to the investors and it is considered that the STO was unsuccessful.
If the collected funds meet the requirement in a mentioned time frame, the fund is utilized to complete the scheme or to launch new schemes.
Investors are encouraged to invest in the IPO so that the planning can proceed further and investors get a higher value for the coin as compared to the price at which they purchased it. While IPOs have investors, STOs have supporters who are interested in funding and motivated to get a good return on the investment.
STO also call ICO 2.0. The first ICO was started in July 2014 by Ethereal. Even though it was the first time, the ICO collected 18M supporters to launch and then it was established.
People were attracted towards this new type of digital currency and wanted to test their luck with the new technology. In the starting, the project was defined in white papers by a developer who already had an experience in bitcoin.
As the first STO was successful and inspirational, the other developers got attracted towards more of STO launches. Consequently, more STOs were launched after that year and many more are in the line as well.
1. No Boundaries
STO is generally launched for international markets. A token sale gets attraction and opens for business across the world than the equities as their scope are not that wide. The international base increases chances to grow 20-25 times more in the given buyer range.
2. Decentralised System
The token introduction can be initiated in any country of the world. The decentralized system makes no involvement of the central government and banks and it creates further individuality. The investors likewise get more benefits than the traditional banking.
3. A New Business Model
The STO launch model renders a technically practical solution for tech companies where initial users get an equal portion of the wealth and the company gets the success.
4. STO Mechanism Advantage
The STO mechanism is built with many useful features. STO coins can be consolidated or subdivided. Coins are easy to trade for selling and buying at cryptocurrency exchanges.
5. Early Coin Purchase Matters
Funds under STO are transparent and verified as well provide clarification about where the STO funds will be spent. In the starting phase of the STO companies, the early supporters have more liquidity and high chances of the rapid capital growth.
6. Best Investment Returns
For the investors who are looking forward to investing in new STO, this is a good choice to get early and fast benefits. As the supporters increase, the fund raises respectively and so the investment as well.
7. High ROI
For the supporters who invest in STO, the chances are quite high to get the success as the ROI stands high for the relevant investment.
With the successful track record of STO transactions, it is also considered as a disruptive innovative tool of this generation.
As all the STO or crowdsale campaigns are not genuine, the investors need to tread with cautions. As these firms are not controlled by some authoritative financial ruler such as SEC, the chances to lose the funds are high as well as the fraudulent initiatives are not trackable.
So before investing in a fund-raising operative, it is advisable to research well about it before buying it unknowingly.
ICOs have gained popularity and propagated so quickly as they utilized the loopholes of the uncontrolled market and the major utility tokens were generated, in reality, alike securities.
So, we can say that regulators will soon announce their guidelines and these loopholes are expected to be ended soon.
It also indicates that the uncontrolled way of ICO will become limited with real utility tokens.
Consequently, little controlled or uncontrolled ICOs will possibly retain their value to fund the social ventures, startups, and tech where the utility tokens will not be considered under the securities laws.
In upcoming time, STOs (Securities Token Offerings) will be known and used in raising the funds for proven and mature businesses.
As securities´ laws are applicable to such category of issuance of tokens, the mature businesses will be attracted due to decentralized, borderless and highly liquid market.
Further, the VC industry is also expected to attract with the STOs soon to liquefy and exit the many illiquid shareholdings acquired by them in a portfolio.
STOs are likely to impact the internal structure of the corporations. Tokens are also important as they permit the corporations to work in a decentralized business manner.
Here is the future of the utility and security tokens:
The problem with the ICOs is due to many avaricious founders, scammers, half-supported business models and cheeky advisors who fool others with making-rich-ride.
The sale of ICOs will be ended in around 6-12 months.
The other reason is the incorrect arrangement of founders’ and investors interests’ because purchasing utility tokens do not permit the rights to shareholders in a respective startup. Therefore, utility token worth is not associated with the founder’s performance and startup success.
It will establish the world of Blockchain including scalability, transparency, increased liquidity, security, easy and fast shares transactions, more inclusivity.
The race of token investors is expected to become very competitive just like the dotcom bubble in March 2000. The unavoidable token crash will be the start of the token economy. And as the dotcom bubble depleted, the mobile internet and social networks came into effect. So, we never know what is going to happen in the future.
After many years, the World of Blockchain and the World of Venture Capital may come together and unite the two worlds.
The second stream of ICOs will be due to equity tokens sales which will permit the rights to investors as a shareholder and comprise liquidation preferences, reporting rights, dividend participation, exit, voting rights, and Pro-rata investment rights.
The worth of many utility tokens is expected to reach zero in the future. We can think the utility token in term of pre-paid voucher considering a non-real service or product. It is also possible that the business models which are based on a decentralized network or protocols may survive.
When the tokenized equity will have regulated and stable technical framework, the break-down of the Venture Capital industry will start because LPs (limited partners) will not resist illiquidity gap of 10 years and when they have an option of liquid options.
It will also form a world of Venture capital consisting deal structuring, deal selection, due diligence by a veteran lead investor, active portfolio management, a legitimate framework to balance founders’ and investors’ interests.
It is clear that the ICO is not going to end in the future, although we can expect certain tweaks in a manner it will go on different paths as compared to what we are seeing today.