2017 was the year of the initial coin offering- (“ICO”), a new way for companies to raise money. Since then, over $22 billion have been raised for companies of all sizes, from pre-product startups to companies with publicly traded equities on traditional stock markets. This fundraising bull market was partially fueled by the Bitcoin and Ethereum impressive rise, but also through the invention of a more liquid investment instrument.
By having a token on a blockchain, the ICO token is easy to create, easy to store, and easy to send to anyone in the world. Initially, companies would sell the tokens, known as utility tokens, for the purpose of using their platform once it was built. However, due to how liquid the tokens were, speculative secondary markets developed, allowing investors to purchase the tokens and then sell them for a higher prices.
By the end of 2017, the United States Securities and Exchange Commission (“SEC”), made it very clear that pre-functional utility tokens sold with an expectation of profit was in fact a security offering. This sparked the beginning of regulatory compliant STOs
However, shortly afterwards, there was an issue. Growing pressure from international securities regulators made it impossible for cryptocurrency exchanges to list security tokens, a non-issue for non-security tokens, such as traditional cryptocurrencies or utility tokens. The only secondary markets available to security token investors were decentralized and peer to peer exchanges, which are illiquid and have poor user experience. The result was a slow down in the ICO and STO markets.
STO and ICO differ in several ways, but the most important one comes from the assets generated within the process.
STO vs. ICO provides a different type of asset to invest in. ICO uses cryptocurrency coins blockchain-based minable or stakable assets that are useless outside the blockchain and have their value in the precise technology behind the blockchain.
STOs, on the other hand, offer security-like assets that are either placed entirely within the legal framework or have hardcoded value by the predetermined terms. Some STOs are registered with the Securities and Exchange Commission (SEC), meaning 100% legal nature of the process. Additionally, STOs don’t require specific blockchain to be active, the ledger of any given STO can be moved from one network to another.
Another significant difference is in the financial behaviour of the issued assets. ICO’s coins are exchanged within the highly volatile and unpredictable cryptocurrency market when investors traded STO’s various platforms and hand-to-hand between the investors (and also on the crypto exchanges).
Mentioned differences simultaneously mean that ICO vs. STO offers more promising assets that can grow in price tenfold when security tokens are more stable and secure choice. While the law protects some STOs, the possibility of new government regulations is endangering the future of many ICOs.
To summarize… STOs allow projects to raise funds in a regulated manner, provides investors with rights over assets, profits or revenue in a company and reduces legal risk.
Security Token Standard
The call to extend the popular ERC-20 and the non-fungible ERC-721 has been in work for months resulting in ERC-1400 (ST-20 ?)
Supported by participating organisations and individuals
The efforts for a standard will bring uniformity in its structure for the issuers to tokenize and issue various kinds of tokenized assets (securities on blockchain) easily.
Invenium Capital Partners auctioning US $66 million building on Ethereum Blockchain; a WeWork occupied property in downtown Miami, Florida. The company is said to tokenize some US $260 million in four private real estate and debt transactions
Aspen Digital – A real estate investment trust (REIT); single-asset REIT intends to only own the St. Regis Aspen Resort raised funds
Andra Capital – A late stage, pre-IPO technology growth fund; an effort to democratize investment
Maecenas – Fine Art – Andy Warhol’s 14SEC sold through dutch auction bidding on Maecenas platform
Lottery.com – Gaming/Gambling (revenue share token structure)
tZero – STO Exchange (offered equity with revenue participation)
22x – Venture Capital Fund (allowing investors to own up to 10% equity)
Security tokens can have a huge impact on the financial system and society at large, as they combine the elements of blockchain technology, especially transparency and security, with the legal certainty of traditional financial instruments. This allows firms of any size to securely enter this new evolving ecosystem. Security tokens promise to provide startups and SMEs with an alternative form of financing that gives rise to a new capital market with 24/7 trading that obviates the need for brokers and bank custody of securities.