A Security Token Offering (STO) is something between an Initial Coin Offering (ICO) and an Initial Public Offering (IPO), born out of an attempt to fit the new and exciting blockchain world into an older, and more rigid financial industry.
An IPO is the first public offering of company’s shares to institutional and individual investors, and this is how a privately held company is transformed into a public company. The “going public” investment process is governed by securities laws and intermediated by investment banks.
Tokens classified as securities are cryptocurrencies that promise future profits for those who buy them during their crowdfunding campaign, or ICO, and afterwards. Most, if not all tokens that are currently classified as utility tokens by their issuer are securities in legal terms. The only reason why some of the ICOs are still able to avoid the regulative third-party involvement is that there are many governments that have not yet ruled on the legalities and regulations surrounding them — but this situation is going to change shortly.
Securities are defined differently in each country depending on the local security laws. In the USA, the Howey test determines that if there is an investment of money into a common enterprise and buyers expect to profit from the efforts of others, the token is a security and goes under various United States Securities and Exchanges Commission (SEC) restrictions, registration and reporting requirements.
In addition to the obvious benefits for the investors and restrictions to the company, the STO opens up the possibility of the tokenization of not only digital assets, like songs and software, but also physical assets like equity, debt, houses, cars, paintings and even fine wine — the possibilities are endless.
There is a school of thought, however that STOs remove decentralization, and ties a company’s hands, as when a company files paperwork with any financial authority to do an STO, they are forfeiting all control. An STO has a registration process legally required by financial authorities with a prerequisite to report all token holders to the financial authorities, too.
In Q2 of 2018, the capital raised by blockchain companies via token sales was approximately $7 billion, which is 45% of the traditional IPO and 30% of the venture capital markets. Compared to the first quarter, the ICO market share is on an upward trend despite the falling prices of most cryptocurrencies since January 2018 when the all-time high occurred.
It is speculated that this will not continue for long because the initial hype and money-throwing mentality of crypto investors has been hindered by the vast number of scams and hacks associated with ICOs. It might be that for those who cannot or do not want to do their research, institutionalized regulation is the most suitable option.
It seems that the days when you could raise 1.7 billion USD within a month through a tokenized crowdfunding campaign without any hassle and restrictions from the government, like the messaging platform Telegram did at the beginning of 2018, are over. If the EU approves the new regulation on initial coin offerings, ICO crowdfunding events will have a cap of 8 million EUR. Only time will tell if there will be a balance between old and new that allows the STO to metamorphose into the ICO 2.0.
Originally published at cryptofinance24.com.
