Security token offerings have made it into the mainstream of cryptocurrency discourse in the last one year. Till date, many people still wonder about the differences between security tokens and other cryptocurrencies.
The Rise of Cryptocurrencies
The rise of cryptocurrency certainly took the world by storm and at present, the strides made by security tokens look commendable. The scrutiny of the US SEC is a major reason for the emergence of STOs and this is not without reason.
In the 2017/2018 cycle, several initial coin offerings came to the market, and tons of billions of USD were raised. However, with the huge attention that attended the crypto market came the rise of scams and outright shitcoins. This was not unexpected.
The emergence of several ICOs with little or no product or service to offer the investor drew a lot of backlash. It became glaring that many of the public offers were scams that had nothing of worth driving them.
The Investor’s Attraction
Someone can ask-why should anyone buy an ICO or STO? The answer is simple- the drive for profits and capital appreciation. The truth be told, a genuine public or private offer provides an opportunity to make money.
When a new business goes public, the potential for growth can be enormous. This is without prejudice to whether it is blockchain-driven or not. The world has seen the stupendous appreciation of Apple stock today. Same can be said of Google or even Facebook.
The parallel of the above can be seen in either Ethereum, Bitcoin or Tron. Each of these crypto came to the public at peanut valuation. Today, their real values are in tens of billions of dollars. Given this scenario, it is clear that early investors did hit the megabucks for their efforts.
Security tokens are so described if they are underlined by a tangible asset, or a defined profit share. So, unlike utility tokens which are issued for a use in a given ecosystem like Bitcoin, security tokens are different.
When the scrutiny of US SEC made the headlines last year, it was due to the resolve to eliminate the rip-off in the ICO markets. So, why initial coin offerings could sprout up overnight, STOs requires more time and painstaking effort.
To a greater extent, the work required for the issuance of STOs can be said to be more laborious. Planning an STO would mean taking care to ensure that all the items on the US SEC checklist gets the greenlight.
In looking at security and utility tokens, what has to be considered is that STOs provide a better platform for accountability. However, this is not to preclude the element of deceit or fraud. The traditional IPO can be manipulated and an STO cannot be said to be so exempt.
The present regulations for security tokens took a cue from the US Supreme Court ruling that is now known as the Howey test. It is the classic case that identifies what qualifies as an investment contract.
The specification can be found in the US securities Act of 1933 and the related 1934 Act for the Securities Exchange. Using the Howey test means a world of difference.
Once an investment contract can be identified as a security, it means it has to be regulated. This is a crucial element that has made many companies brace up for change in the crypto scene.
For an STO to make it to the market then, it has to follow a laid down set of regulations. What is applicable at present is that anyone offering an STO has a compliance list to adhere to.
For example, most STOs that make it to the US market try to use the Regulation A+ exemption clause. This qualifies them to use a crowdfunding provision with a cap of $50 million.
In addition, each project so described has to come with:
- An independent auditor ‘s certified financial statements
- A concise description of the security on offer
- A clear description of a offerors’ business direction and properties
- Details of company management
Each of the above stated four requirements definitely subjects the offering company to more public scrutiny and this helps the cause of investors.
STO V ICO
In looking at STOs and ICOs, the following can be taken into consideration:
The KYC Requirement
One of the major fallouts of STOs is the rise in KYC (know your customer) compliance across board. So far, many players in the crypto scene have started implementing KYC compliance. This is the background to the use of whitelists by many crypto organizations so far.As an anti-money laundering prop, KYC sheds greater light on who is who, and traceability is enhanced. This is a world of difference from the ICO journey of 2017/18/.
Length of Time
Most ICOs as seen in the past year or two were done and dusted in about two weeks. The common approach was for the issuer to provide a smart contract and a crypto wallet address.
Everyone who participates in an ICO gets a token allocation at the end of the day. This made ICOs fast and a precise way to raise funds. However, the STO route is not the same. More time is needed to adhere to regulations, or the issuer could risk litigation.
One of the distinctions of STOs is that subscribers have to deal with a lock-up period. This means that subscribing could mean not having a chance to sell off the token in as long as 180 days.
Many ICOs bypassed this clause to attract more subscribers. However, putting up your funds in an STO means you have done your homework. It also means you will be willing to wait out the lock-up period.
No ICO came under the radar of SEC requirements to register and file. Having to register with SEC offers more safety to would-be investors. The regulatory checks mean that any infraction could be sanctionable and also stands as a safety net
STOs and ICOs have many similarities that are not in doubt. The clear path is that many organizations would have to use the STO route in the coming days. Cryptocurrency regulation is gathering momentum across the globe and the investor is the better for it.
Denise Quirk is a Health Advisor who is fascinated by Crypto and Blockchain Revolution. She is a believer of transforming complex information into simple, actionable content. She is keenly interested in finding the value of the crypto world. You can find her on Linkedin, Twitter and Facebook.