Understanding the difference between STOs (Security Token Offerings) and ICOs (Initial Coin Ofhasngs) has never been greater.
And I know you will agree with me when I say ICOs have done a fabulous job in democratizing crowdfunding and capital funding in its real sense.
But I think you also will agree with me when I say:
Differentiating a legit ICO from a fraudulent one is tough.
And it has also turned out that ICOs are now being treated as fraudulent investments or just like scams.
But what if I told you there is a better way of doing crowdfunding than ICOs.
Well, don’t get surprised when I tell you that it is STOs.
And in this post, I am going to tell you everything you need to know about ICOs and STOs but before that, I think it is imperative to deep dive into ICOs to understand why there is a need of STOs at the first place.
Initial Coin Offerings popularly abbreviated as ICOs came to the scene in early 2013 as a vehicle to raise capital for bootstrapping new projects by issuing digital representations (i.e., tokens) on the Bitcoin’s blockchain.
Well, even I was when I found this for that first time that Bitcoin’s blockchain was used to offer the first coin offerings. But back then it was not even called as ICO.
The first ICO that happened ever was for Mastercoin by J.R. Willett over the Bitcoin’s blockchain:
Initial coin offering (ICO) is a controversial means of crowdfunding via the use of cryptocurrency, which can be a source of capital for startup companies. In an ICO, a percentage of the newly issued cryptocurrency/token is sold to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum.
Early token sales were held by Mastercoin in July 2013 and Ethereum and Karmacoin in 2014, but “mainstream” ICOs began with messaging app developer Kik in September 2017.
To simplify, ICOs are merely a token distribution event where investors invest in BTC or ETH or Fiat in return of the native tokens of that particular project. And this token can represent a hell lot of things such as pre-sold rights to access the service when the product is ready or a revenue sharing token etc.
But the critical thing to note here is that there is no oversight on these tokens or ICOs and thus they can often turn into outright scams where investors lose their money.
And that’s what has happened.
What Went Wrong With ICOs
Most ICOs have turned into honeypot scams for investors without they realizing. A report suggests that more than 70% ICOs in 2017 were scams.
By now in 2019 this has happened many times that the investors of the ICOs have been cheated in various ways by the creators of these so-called ICOs because of lack of regulatory oversight.
Some of the common ways in which ICOs have scammed investors are:
- Outright scam with no product/team/roadmap
- Incompetent team promising infeasible things
- Special discount deals to insiders for the profitable future trading of these tokens.
- Exit scams etc.
So these are things that have broadly gone wrong with ICOs and believe me these are enough for the markets to start ignoring them or start labeling them as ‘Scam Investment Vehicles.’
And that is what is happening as fewer investors are now interested in ICOs, but some good old friends are still conducting as well as evangelizing ICOs due to regulatory weaknesses.
But regulators are coming for them.
As you can see here on the SEC website, ICO related cyber enforcement is on their top tier list and here are some of the culprit ICOs against whom actions have been already taken:
Introducing STOs: Difference Between STO & ICO
All these problems have given birth to STOs
STOs are new crowdfunding vehicle much like the ICOs but with a strict regulatory framework attached to it.
STOs are also like IPOs or PPOs but in a more digitized way with the infrastructure of blockchain underlying it. This is a considerable market transition that has started to happen, and this market of STOs is expected to grow to 10 Trillion Dollars by 2020.
To simply put:
STOs are also digital tokens issued over the blockchain, but they all need to abide by the regulations of securities where they are getting launched.
For example in the US, STOs are governed by the Securities Act of 1933 and are judged by ‘Howey Test.’
And the tokens launched during these offerings are called security tokens because they are backed by real-world assets like company shares or LP shares, bonds, real estate or art pieces.
The holders of these security tokens will have more power and protection than the holders of simple unregulated utility tokens. Security token holders can have voting rights, dividends rights, right to legally sell their capital or interest, profit sharing model, etc.
And by being so, Security tokens or STOs have to be compliant with one of these regulations atleast to launch a token offering in the US and here are those regulations.
- Regulation D (Reg D)
Regulation D (Reg D) is a Securities and Exchange Commission (SEC) regulation governing private placement exemptions. Reg D allows usually smaller companies to raise capital through the sale of equity or debt securities without having to register their securities with the SEC. Read more: Regulation D (Reg D). In this case, investors have to be accredited investors, and their initial purchase will be locked off 12 months initially
- Regulation A+ (Reg A+)
Regulation A+ (Reg A+) is an alternative to a traditional IPO, which makes it easier for smaller, early-stage companies to access capital. With this Reg, one can issue securities to non-accredited investors and can raise up to $50,000,000 in the capital. And this method also takes up more cost and time for implementation on the ground.
- Regulation S (Reg S)
Regulation S is a “safe harbor” that defines when an offering of securities is deemed to be executed in another country and therefore not be subject to the registration requirement under section 5 of the 1933 Act.
And as per the securities law of the US STOs have to provide full disclosure as well as proper documentation to the SEC to get fully regulated. And mind you this document needs to be more detailed than the shitty whitepapers that scammy ICOs have been spitting out randomly.
What Is An STO Cryptocurrency?
And it doesn’t get over here:
Many people ask what the difference between STO crypto and normal ICO crypto is?
Well, the difference is of legal rights and protection as I have explained in the above section. But in short again, security tokens are more regulated and thus protects the rights of investors.
But because of these regulations, you won’t see crazy 100x jumps in the prices of security tokens because real-world assets back them.
So in a nutshell:
STO cryptocurrencies are those who are launched in security token offerings under the oversight of securities laws of that country.
Is An ICO A Security
And it gets better:
Due to all the reasons and confusion over ICOs many investors have started becoming cautious and are asking, is this or that ICO a security?
Well, this happening because the US SEC has found that many ICOs are trying to dough the regulation by labeling themselves as a utility token.
But let me tell you a secret:
This trick isn’t working anymore.
Sure, SEC took its initial time in educating itself, but now they can clearly distinguish that most of the ICOs are securities and this is evident from their this statement on ICOs:
"I believe every ICO I've seen is a security" — the head of the SEC, Jay Clayton, sez.
— Nathaniel Popper (@nathanielpopper) February 6, 2018
Further Jay Clayton, SEC Head stated this:
SEC Chairman Jay Clayton: "I want to go back to separating ICOs and cryptocurrencies. ICOs that are securities offerings, we should regulate them like we regulate securities offerings. End of story." pic.twitter.com/z1X2EyLxwx
— Coin Center (@coincenter) February 6, 2018
Under the given statements and circumstances investors need to be vigilant about where they are investing their money and should double check.
But as rule of thumb:
Not all utility tokens are securities but most are, and a security token can have a utility, but that doesn’t exempt it from getting regulated.
What Should You Choose: ICO or STO & Why?
This isn’t a question to be asked but many would be breaking their heads over it so let me pitch in.
Of course, if you want highly speculative investments with 20x to 100x returns with high risk and no protection, ICOs are the way to go for you.
And if you are ‘Prudent Harry’, you will naturally choose for STOs because it makes more sense in protecting your investment but let me tell you that this not easy.
As not all STOs will accept all types of investors and that’s where the democratic game of ICOs become more centralized with STOs.
In most of the STOs, you will need to go through AML-KYC checks to get whitelisted for the investment. Furthermore, there can be restrictions that one needs to be a US citizen only or not be a US citizen etc.
Sometimes only accredited investors or qualified investors or qualified purchaser will only be allowed to participate in a particular type of STO.
And which type of investor can invest will be determined by the kind of regulation that STO is following. Like the ones that I shared before, Reg D, Reg A or Reg S.
Furthermore, the listings of the STOs will also happen accordingly where full disclosure of the type of regulation applied to that STO will shared beforehand.
Evolution Of ICOs To STOs: Who Is Winning
Well, it is not about who is winning because it was just meant to happen, even if some of us might not like it.
Confused !! What I am taling about?
Well, I am talking about the transition of real-world asset into the tokenized securities and Hola! Blockchain has made this possible.
In the future, you will see this transition accelerating from ICOs to STOs for securities offerings because of regulatory pressure as well as the efficiency/liquidity securitized tokens promises to bring in the traditional financial world.
Post that expects to see even the evolution of security tokens into its various versions such as tokens that are merely regulated to tokens that are regulated as well as AML & KYCed with identity management built in them.
And in the end it the regulators and the investors who are going to benefit from this transition because it will bring more transparency and compliance instantly available.
So that’s how the world of security tokens is going to look when STOs go full-fledged.
Now you tell us: What do you think of STOs? How is this approach than the traditional ICO? Let us know what do you think in the comments.