The mercurial rise of the ICO fund-raising model has led many industry players to look for better ways to seamlessly integrate it into business and financial functions. Initial coin offering (ICO) was seen as a revolutionary idea that was meant to rewrite the initial public offering concept; it was seen as the bridge between the blockchain technology and venture capitalism but that has not been the case.
Now, a new concept is gaining mainstream acceptance. This new concept is referred to as a Security Token Offering (STO).
But this time, companies and start-ups planning to join the STO bandwagon will need some high level of finesse so as to be successfully. 2017 saw many ICOs dominate the market but not all of them were legit and this has made investors to be more careful. As a result, start-ups and companies planning an STO will need a solid strategy or partner with a team of experts who have studied the blockchain industry and its related technologies.
To define a security token, let’s first look at the Howey Test. Basically, the Howey Test is a principle that asks whether the value of a transaction for one of its participants is dependent upon the other’s work. At its core, the Howey Test determines that a transaction represents an investment contract if “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.”
The U.S. Securities and Exchange Commission (SEC) decided to intervene by blocking the sale of the land when Howey Co. failed to register the transactions. But the case was appealed and arrived in the U.S. Supreme Court. The U.S. Supreme Court ruled that “the transactions in this case clearly involve investment contracts, as so defined. The respondent companies are offering something more than fee simple interests in land…they are offering an opportunity to contribute money and to share in the profits of a large citrus fruit enterprise.”
In the case of Howey Co., the investors in the Florida land saw the transaction as valuable only because of the work that others would perform on the land. By the standards of the Howey Test, this classifies the transactions as an investment contract and hence the transaction needed to be registered, and the Howey Co. was found to have violated the law by failing to do that.
Therefore, a security token is a crypto token that passes the Howey Test and they usually derive their value from an external, tradable asset. Because the tokens are seen as a security, they are subject to federal securities and regulations. 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.
Security Tokens are subject to federal security regulations and in the U.S., in particular they need to follow these regulations:
Regulation D allows a particular offering to avoid being registered by the SEC as long as “Form D” has been filled by the creators after the securities have been sold. The company or start-up which is offering this security may solicit offerings from investors in compliance with Section 506C.
And Section 506C normally requires verification that the investors are indeed accredited and the information which has been provided during the solicitation is “free from false or misleading statements.”
This exemption allows will allow the creator to offer SEC-approved security to non-accredited investors through a general solicitation for up to $50 million in investment. In order for the requirement to register the security, the issuance of Regulation A+ can take a lot more time compared to other options. For this reason, Regulation A+ issuance will be more expensive than any other option.
This applies when a security offering is executed in a country apart from the U.S. and is therefore not subjected to the registration requirement under section 5 of the 1993 Act. However, the creators are still required to follow the security regulations of the country where they are supposed to be executed.
Data from Polymath- the first security token platform- shows that security token offerings will prevail on the market by 2020 and will be more than $10 trillion. The security token offering industry is really gaining traction and will soon hit the mainstream. Various platforms and multiple exchanges have either already integrated the support of security tokens or are making plans.
The following are, in fact, making plans to integrate the security token functionality into their platforms.
We know very well that in an IPO, most private assets are relatively illiquid, which means investors face a difficult and costly time trying to convert them into cash. Besides, access to capital has never been easy for early stage companies and not to mention that traditional financial transactions can be expensive thanks to the fees associated with the middlemen like banks. Security tokens remove the need for middlemen which reduces fees as smart contracts will be able to automate many of these processes that requires middlemen.
Honestly speaking, most people fear investing in ICOs since most of them turned out to be scams and this somewhat did a great disservice to blockchain technology. Data from Statis Group shows that more than 80% of ICOs conducted in 2017 were scams while other studies show that more than a thousand crypto projects are already “dead” as of June 2018.
The medium return from tokens in Q2 was – 55.38%, compared to +49.32% in Q1. ROI after 3 days on an exchange in Q2 18 was – 21.59% with 57% of tokens trading below the ICO price. The reason for this is that there is a lack of regulation for utility tokens. But STOs will help improve the crypto space as they are subject to regulation and provides no room for scams.
Chinese investors find it difficult to invest in private U.S. companies and the reverse is also true. That’s why we need security tokens as companies/start-ups can easily market their products/ideas to anyone across the globe on the internet. This exposure to free market helps in increasing asset valuation and exposes start-ups to a large pool of investors.
For equity STOs, companies can sell common stock instead of preferred stock. This effectively lets the founders retain a higher percentage ownership in their company, especially in downside scenarios.
ICOSERVICE enables you to easily sell your security tokens via security token offering (STO) crowd-sale. We will help you raise millions of dollars by providing marketing services and STO-based knowledge. Essentially: