LOGIN

GIANTFINEX +

STO

What is an STO (Security Token Offering) &
10 Reasons Why It Will Have a Massive Impact
The world of startup financing took a major turn in 2017 as initial coin offerings (ICOs) burst onto the scene. In 2017 and 2018, more than $14 billion flowed into blockchain projects as investors looked to capitalize on crypto euphoria and the low barriers to entry made possible by the ICO funding model.

It has been less than a year since the market for ICOs went bust, but the impact of the new crowdfunding model will endure for many years to come as startups look to tokenize real assets and leverage the power of the crowd to finance their next major project. But in order to do so, these companies must follow standard securitization practices laid out by the U.S. Securities and Exchange Commission (SEC), which has deemed all crypto assets, except bitcoin and Ethereum, to be securities. At least, this is the case for projects seeking exposure to U.S. markets.

The SEC’s position on ICOs doesn’t differentiate between so-called utility tokens and security tokens. For all intents and purposes, new token offerings must comply with federal securities laws. Naturally, this has given rise to a new paradigm: the security token offering (STO).
What is the difference
between an ICO and an STO?
While the SEC at times has been ambiguous about how it plans to regulate ICOs, securities that fall under its purview are governed by well-defined laws. This same principle extends to tokens that the SEC deems to be securities. These are the so-called “security tokens” that everyone has been talking about. A “security token” actually isn’t a universal definition, but a standard classification used by U.S. regulators when dealing with token projects that have the characteristics of a security.

A security token is any cryptocurrency that pays dividends, profits, shares or interest or invests in any other asset that also generates profits. Although some ICOs have attempted to circumnavigate this definition, the SEC uses the so-called Howey Test to determine if an asset meets the definition of a security. According to the Howey Test, a cryptocurrency token is a security if it invests in money, invests in a common enterprise or expects to make a profit from the effort of others.
STO VS ICO: THE MAIN DIFFERENCES
Unlike an ICO, a security token is essentially an investment contract into an underlying asset; it has all the attributes of a security in that it is a fungible, negotiable financial instrument that represents actual monetary value. STOs are backed by real assets and follow the SEC’s guidance on compliance, issuance, and trading.

An ICO, on the other hand, technically has no collateral. Issuers tried to circumvent regulatory requirements by claiming their tokens were a utility as opposed to a security (as we mentioned earlier, the SEC doesn’t buy that argument). An STO is neither an ICO nor an initial public offering a la stocks; rather, it overlaps both fundraising models.

During the evolution of the ICO market, the blockchain industry developed the Simple Agreement for Future Token (SAFT) framework, which ensured that “security tokens” were only sold to accredited investors. SAFT was designed to simplify investor verification and accreditation. However, the model was short-lived as the tokenization landscape continued to evolve. When the market went bust, SAFT wasn’t really needed anymore.
UNDERSTANDING THE STO ECOSYSTEM
When a company wants to issue a security token giving investors a stake in its enterprise,
it must seek out the support of the following players:
STOS : THE ADVANTAGE
From the perspective of investors, an STO has several advantages over the preceding ICO funding model. Firstly, STOs are lower-risk investments because they are enforced by federal regulation. In the United States, this means they have to meet SEC requirements around transparency. At the same time, the STO still retains many of the benefits of an ICO, including lower costs and ease of access. And because they are regulated, STOs could potentially open the door to institutional investors who otherwise wouldn’t have invested in the previous iteration of the token sale.

A regulatory framework also means that investors can worry less about scams and fraudulent projects that inflicted damage on the ICO market. At one point, it was estimated that 4/5 ICOs  conducted in 2017 were in fact scams.

When collateralized assets are tokenized, they allow for fractional ownership of real assets, which gives investors more options to diversify their portfolios – again, at a lower cost. This means STOs will continue to offer opportunities to smaller investors who were originally drawn to the ICO model.
STOS : THE DISADVANTAGES
Although regulation is considered advantageous from the perspective of investors, compliance is relatively complex for token issuers. That largely explains why the STO market has been much slower to launch than its predecessor. In fact, during the ICO boom, many blockchain companies refused to sell their tokens in the United States due to complex regulations and the need to identify as a security token.

The hold up is also due to a lack of appropriate exchanges to facilitate security token offerings. Overstock’s tZERO, arguably the most closely-watched token platform, officially launched in January to accredited investors but this doesn’t seem to have created a strong STO pipeline just yet.
10 REASONS WHY STOS COULD CHANGE THE CRYPTO MARKETS
Taking into account the market’s appetite for high-quality, compliant cryptocurrencies, there’s a strong reason to believe that the STO model will have a lasting impact on the blockchain ecosystem. Below are ten reasons why STOs may in fact change the dynamics of the crypto industry as a whole.
THE BOTTOM LINE
The ICO boom may be long gone, but the age of tokenization has only just begun. According to digital asset banker Finoa, tokenization has the potential to do to ownership rights what digitization did to media. This new paradigm will impact everything from standard issuing products like stocks and bonds to smaller and more illiquid assets like business shares and real estate.

For these reasons, there’s a lot to be bullish about when it comes to security token offerings. A current reading of the market suggests demand and adoption will be slower to materialize given that regulatory standards have only just been applied and implemented. But the launch of tZero and the growing appetite for blockchain-based projects means STOs are a potentially future-proof asset class.
※ Source : ccn.com
Scroll To Top

E-mail : [email protected]

Copyright © 2019 GiantFinex. All rights reserved.