It seems certain that in due time STOs will replace ICOs as the compliant model of crowdfunding on the blockchain. So, we decided to take the time to explain the crucial difference between these two models, and why STOs will surely be a staple of the blockchain industry’s future.
With ICOs falling to the wayside as legal concerns over them continue to accumulate, a new token offering model is on the horizon: security token offerings.
Security token offerings have been making a splash as of late, but they’re still flying under the radar for most people. So let’s get to the bottom of it: what is an STO really? — and how is it any different from an ICO?
What’s an ICO?
An ICO, as you may already know, stands for ‘Initial Coin Offering.’ It’s a common method to raise funds where a blockchain-based company sells their tokens with the promise that it will have utility in the future. A company conducting an ICO does not sell equity, but instead sells its tokens with an intent of distribution.
ICOs were all the rage in 2017 and early 2018, raising billions upon billions of dollars. However, a disproportionate number of these projects have failed to deliver. Many ICO investors have grown angry and skeptical of the model. This has only gotten worse during 2018 as so many ICOs close their doors due to their inability to stay solvent during this year’s bearish market.
The problem with ICOs is that, as a financial instrument, it’s on shaky footing. There’s no certainty that the tokens you buy during an ICO will have any value whatsoever. At such an early stage, it’s practically all speculative. This is why it’s gotten into some hot water by the Security & Exchanges Commission. With ICOs, you’re essentially buying hope and, as we’ve seen so often, this hope is often a whole lot of nothing.
To the SEC, virtually all ICOs are securities: end of story. This is why almost all ICOs in the past year have not allowed Americans to participate; they want to avoid the legal headache.
OK… so what’s an STO, then?
Security Token Offerings (STOs) are increasingly being seen as the new, legitimate way to crowdfund projects on the blockchain. This is because, to the SEC, there is “no such thing as utility tokens.” ICOs have to be compliant because they are effectively selling securities but being dishonest about it.
Think of regular crowdfunding and now imagine if that same concept was tokenized. Instead of representing equity the old-fashioned way, you would receive a token which represents equity. Tokenized securities, in effect, give buyers ownership. And this ownership does not necessarily need to be equity, it can also be real estate or financial derivatives. The point is, STOs are legally-compliant, licensed ICOs which protect investors against fraud. They’re the new, SEC-friendly ICO.
STOs effectively use our current-existing laws for securities and apply them to blockchain industry. Being compliant from the beginning, STOs aim to be the regulated financial vehicle that ICOs were not, thereby instilling more confidence in investors by minimizing risk.
STOs open the door to a whole host of new opportunities for the blockchain space. For example, traditional companies will be able to host their own STOs as more and more traditional assets become tokenized and migrate onto the blockchain. STOs are thus the bridge that traditional finance and the blockchain space desperately needed to finally have a point of convergence. Once the remaining legal questions are cleared up, STOs have the potential to open the floodgates for veteran investors to enter the cryptocurrency world.
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.