Security tokens have a current reputation as being available only to the wealthy. Yet with the quickly developing pace of the industry, eager investors are now asking: “When can I get in?”
A recent Bloomberg article described how security tokens have emerged as the new cryptocurrency, but are limited to a very small, wealthy demographic: accredited investors.
To be blunt, this is true. For now.
The question now circulating the security token space shifts to the timeline of such confinement. How long will it take security tokens to move beyond the barrier of accredited investors? Will that ever happen?
The answer to such a question requires putting security tokens in their proper context.
How Cryptocurrency Went from the ICO to the STO
According to sources such as CoinSchedule.com, Initial Coin Offerings (ICOs) raised more than $21 billion in 2018.
In June of 2018 alone, $5.8 billion was poured into ICOs— the highest amount in any single month throughout the young history of cryptocurrency.
Yet, through crypto’s ongoing bear market, investors lost an estimated 90% of those funds.
Spectators watched as the industry’s value crumbled in comparison to its highly anticipated expectations. Those spectators included regulators, who soon caught up to the action.
Many in the space became cautious after SEC Chairman Jay Clayton said virtually all ICOs he has seen, constitute securities. They must then either register as a security or file for an exemption.
The SEC claims that the purpose for such a process is investor protection and the maintenance of market integrity. Their procedures— they hold— will prevent the sort of thing seen in cryptocurrency’s current bear market from happening in regulated markets. Many believe that a market with $21 billion invested annually ought to be regulated.
That’s where security tokens come into the picture.
As illustrated below, nearly 100 STOs are expected to launch throughout 2019.
Image courtesy of Bloomberg.
The advantages of STOs are not just limited to their comparison with ICOs. STOs are also seen as significantly advantageous when compared to costly IPOs. This is so much the case that some consider the STO to not be the new ICO, but the new IPO.
Such benefits are extremely attractive to small enterprises who wish to raise private capital— a generally limited and difficult venture.
Spice VC— a tokenized VC fund— can serve as an example of how the process works, in one variation.
Spice VC raised more than $15 million through their security token, which provides holders with a share of the company’s proceeds upon investment exit.
For the compliant tokenization of its fund, Spice utilized Rule 506(c) of the SEC’s Regulation D. Under such a rule, the company was exempt from normal securities registration rules. The company also used Section 3(c)(1) of the SEC’s Investment Company Act of 1940, allowing private funds to avoid a large majority of SEC regulations.
Under the above conditions, Spice was able to offer tokens to no more than 99 investors who had to prove their identification and accreditation status, and agree to a respect a token lock-up period.
Security Tokens: How much longer until they are available to the public?
With a bit of security token context put into place, the answer to the original question becomes clearer.
Security tokens are so early that they have literally just arrived. Only two SEC-approved security token trading platforms exist in the United States, and with a mere handful of compliant security tokens that can be traded.
Yet, like the majority of blockchain-based assets, the individuals aware of security tokens and their benefits is a drastically small portion of the world’s population. Security tokens, after all, feature the tokenization of real-world assets, meaning they require adoption in the real-world, not just in the world of blockchain.
How long the timeline will take for public access to security tokens is entirely unclear at this stage of such early development.
What we can see, however, is that real-world adoption of security tokens must first take place, before we can start forecasting a timeline of public availability.
What do you think about security tokens being confined to accredited investors? How do you see the future playing out in terms of public access to security tokens? We want to know what you think in the comments section below.
Meet Tim. Tim is a co-founder of The Tokenist. Originally from Kalamazoo, Michigan, Tim is a mechanical engineer by training and has been investing his whole life. He started his career with GE in engineering and operations management where he held various leadership roles before leaving to pursue an MBA (he is a proud former co-chair of the Milton Friedman Group at Chicago Booth). After business school, Tim spent several years with Baird Capital where he made private equity investments in consumer and industrial companies. He left Baird to found Protective Technologies Capital in 2018, where he continues to make private equity investments in family businesses looking for help with succession planning. Tim lives in Chicago, where he enjoys watching Michigan football and basketball and traveling with his wife Kristen. Like Sia, he also likes telling jokes. However, his wife adamantly insists that he not share his “dad jokes” publicly so he reluctantly sticks to writing about finance and technology.