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Are Security Token Offerings Good for Blockchain Crowdfunding Business?

Ronon Margo

Over the past few months, there has been a huge boom over Initial Coin Offerings. Most of them have been genuinely offering ICOs while the rest of them remain problematic. Solution providers around the globe were offering White label ICO platform to instantly create an ICO. The problem with ICOs is they are termed to be scams. It is also that many of the utility tokens are offered are securities. Because of this, they are termed to violate the securities laws in the United States. During the mid of 2017, the SEC released a note stating that certain tokens were eligible to be classed as securities, and would, therefore, be subject to regulations.

26-02-2019 17:20:36  |   Analytics
Despite this, most of the startups were setting up their tokens as a utility, the SEC operates using the “substance over form” rule, meaning that they look at tokens according to how they are actually used, as opposed to the way they were intended to be used. Moreover, all the ICO tokens are expected to enhance the value within a specified amount of time. As a result of speculation and product development since the supply is fixed. Hence, most people buy ICO tokens as a form of investment. Thus, to get rid of these problems, Security Token Offerings (STOs) came into existence.

Security Token Offering (STO): What you need to know

STOs are similar to ICOs where an investor exchanges money for coins and tokens representing their investment. The major difference here is security token offerings go a step further and distribute the tokens which come under the category of securities. This means that they are linked to secured assets such as stocks, bonds, investments, funds, etc.

These security tokens are fungible, negotiable tools that come with an attached form of money such as monetary money, property, etc. Similarly, the crypto exchanges which want to offer security token trading should also comply with the regulations, investigations into token listings, data sharing, etc.

On the flip side, tokens offered in ICOs don't give any investor rights or obligations. Instead, they provide access to a specific network or services. While in the case of STO, they act as financial securities that are backed by assets, profits or revenues. A security token performs the same function as conventional security, except that it confirms ownership through a blockchain platform. Sometimes, it also makes fractional ownership whenever possible. Moreover, they have a great set of advantages when compared to Initial Coin Offerings.

STOs: What do they have for the blockchain Industry?

The first security token offering was launched by Blockchain Capital on April 10, 2017. This STO has managed to raise around $10,000,000 in a single day. Since then, STOs have gained traction right from 2018 & 2019.

With this drastic growth of Security Token Offerings, they have managed to raise around $562 mln by issuing shares through tokens. These security tokens have the following set of merits and advantages:

1. Process Management

  • Efficiency. With a real-time ledger of asset ownership available with security tokens, one can efficiently manage and automate dividends, profit-sharing, etc.
  • Attracts Investors. As the lifecycle process gets simplified, it attracts a huge set of investors. In addition to this, as they are concerned with security, they remain more attractive.
  • Programmable. Security tokens can be programmable and enforced by smart contracts. Hence, one can change the code as per the requirements.

2. Initial Issuance

  • Credibility. Most of the people have scammed with ICOs. As most of the projects failed to deliver what they promised, investors lost interest in them. In contrast, most of the STOs follow all the regulations which bring credibility.
  • Lower Administrative costs. The share creation and distribution processes are made efficient by developing tokens directly to the appropriate account and distributing them to investors on the blockchain system. With this, the cost will also be effective.

3. Secondary Trading

  • More Liquidity. Security tokens will trade on specialized security token exchanges so investors will have a convenient way to liquidate their assets.
  • 24*7 Trading. Security tokens can be traded across 24*7 without any interference in the middle. This has been the major benefit when compared to traditional models.
  • Global Investor Participation. As these tokens enjoy high-level liquidity, they are eligible for global trading. Hence, anyone across the world can start to buy and sell security tokens. With the increased adoption, these tokens can enhance liquidity.

How to offer a Security Token Offering?

If you want to issue a security token offering to your investors, initially you should register with the SEC. However, it is somehow a complex and expensive process for established businesses. To get rid of this process, projects can make use of the JOBS Act from 2012. Thus, issuers in the US can apply any of these regulations:

  1. Regulation S
  2. Regulation D
  3. Regulation A+
  4. Regulation CF

Investors can select the regulations in accordance with their location and business requirements.

Yet another way how STOs differ from ICOs is through the Howey Test. According to this test, a transaction is considered to be a security, if it satisfies the following criteria:

  1. It should be an investment of money.
  2. The investment is in a common enterprise.
  3. There is an expectation of returns from the work of the promoters or the third party.

And the token which passes the Howey Test is termed to be a security token.

Recent Updates. The Future of Security Token Offerings

With this instant popularity, the famous crypto exchanges are expected to allow security tokens in Japan, 2019. The leading bitcoin trading platforms such as Nomura Securities and Daiwa Securities, Kabu.com Securities, Rakuten Securities and Monex Group will start accepting this. Their main issue surrounds the placement of security tokens on crypto exchanges that are not qualified or registered successfully. STOs are growing at a greater pace and are intended to replace ICO’s in terms of popularity, aided by government breakdowns. Altogether with the introduction of these trading platforms, it is almost clear that there are many changes to appear in the industry.

About the Author

Ronon Margo is a Crypto Writer at Icoclone. He loves to share ideas & thoughts on blockchain & cryptocurrency in a simple and readable manner.

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