Is Security Token Offering the new ICO
The world of private equity has seen many changes over the past few years, right up to today’s world of absolute disruption. Back in the day the sector was largely defined by venture capital firms and accredited investors. This changed in May 2016 thanks to Title III of the JOBS Act whereby anyone could invest in private companies.
But the real impact came in 2017, the year of the blockchain technology and initial coin offerings which meant that start-ups/companies could raise capital without the need of a middleman. Industry analysts, entrepreneurs and experts saw the ICO model as the new disruption that was going to revolutionize the private equity landscape by making it more equitable and democratized.
- Initial coin offerings have so far raised billions of dollars of investment with statistics showing that more than $18 billion has been raised this year from ICOs, driven by “mega crowdsales” of over $100 million. ICO funding in Q1 2018 alone surpassed 2017’s total ICO funding of approximately $4 billion and according to CoinDesk, during Q1 2018, ICO funding reached $6.3 billion, that is, 118% of the total for 2017. Blockchain platform EOS had the largest ICO after it raised a whopping $4.1 billion. Messaging service Telegram came second after raising $850 million.
But despite this success, not all of the projects are hitting their targets while some have even faced lawsuits. As a matter of fact, studies indicate that of the 913 projects that had tokensales, only 48% were successful while 14% didn’t survive this stage. The rest, that is, 38% stayed unreported, with no data displayed. Some even had their websites and all traces of them disappear. The result is that the hype around ICOs has really died down especially as regulations tighten up. Additionally, most ICOs are struggling to deliver on their promises and this was evident in May 2018 whereby of the 195 ongoing ICOs that were planning to close sales, only 91 achieved their bottom lines, with total of $2.57 billion raised.
Of course, the ICO model has a lot to offer but it is still in its infancy and hence it’s evolving just like the Internet before it. It will go through many changes especially along the lines of security, transparency, and reliability. This means the public will want a system that integrates the benefits of an initial coin offering but has some degree of regulation. Enter security token offering (STO); it promises to be the next revolution to hit the mainstream and disrupt industries far and wide.
Introducing Security Token Offering
Normally in an initial coin offering, a company sells a predefined number of tokens or rather “utility tokens” to the public. But the problem with these tokens is that they are just like the loyalty rewards points given by credit cards, in some cases, and barely need to be denominated in token form for the blockchain-based platform in question to work.
The whole concept is sometimes unclear especially when it comes to attaching value to these tokens as the market pretends that the underlying business’s value proposition and market make its tokens more valuable. The emphasise here is that participants with utility tokens are purchasers of a service, and not investors in it and thus by contributing to an unregulated crowdsale only enables them to use the service itself, and nothing more. That’s why a security token offering makes sense when it comes to initial coin offerings.
- A security token offering (STO) refers to the sale of tokens that can represent a company’s equity and thrives within a fully compliant trading ecosystem. Security token offerings create the high-demand for a system that allows functionalities and benefits that traditional stock market cannot provide.
In other words, security token offerings combine aspects of ICOs with IPOs to provide the seemingly perfect balance between gaining access to capital at a low-cost while remaining compliant with securities laws. This is achieved through security tokens which are essentially digital, liquid contracts for fractions of any asset that already has value (think a real estate property, a car, a painting, equity in a company, etc.).
These tokens are meant to operate more like traditional securities and to meet all the requirements of the SEC. Examples of this would include the Venezuelan government’s oil-backed Petro coin. To put this into perspective, data from the first security token platform- Polymath shows that security token offerings will prevail on the market by 2020 and will be more than $10 trillion.
Let’s have a detailed look at the benefits of Security Token Offering (STO)
Benefits of STO
- Fractionalization of Assets- STO means that fractional ownership of a real asset can be denominated in tokens and consequently, investors can expect that their ownership stake is preserved on the blockchain ledger.
- Greater transparency- Just like shareholders, the security token holders can vote in the decisions of the start-up/company as they see fit and this helps ensure transparency.
- STOs are regulated- The issue with ICOs is that utility tokens are unregulated and this means that business organizations raising capital can easily bypass institutional finance alongside the costs and accountability required. But with STO, the picture is totally different as it’s safer to raise funds. Security token offerings are fully compliant with the U.S. Security and Exchange Commission (SEC) laws and this helps create stable conditions needed to run a company.
- Improved market efficiency- Security token offerings provide security to investors with its recognizable structure and its affiliated technological advancement, and as a result, investors will trust your project and definitely invest in it.
This has seen big companies such as Overstock which are leaning toward security token offering. Through its’ subsidiary- tZERO, a security token exchange, the company signed a letter of intent with investment company GSR Capital for the purchase of $160 million in tZERO Security Tokens.
STO- Merging the Traditional Financial Market and the ICO market
2017 saw many scam ICOs and as a result, the cryptocurrency market crashed at the beginning of 2018. The point here is that Security Token offering creates a supportive ecosystem that merges the traditional financial market and the cryptocurrency market together, for the betterment of both. This means that projects with real value and which decides to go the ICO route are the only ones that will benefit and those that are just seeking a quick fundraising route will not succeed this time round.