Chapter 5: The State Of Security Token Offerings In 2019

 

ICOs were all the rage throughout 2017 and 2018, but as multiple ICO-backed companies failed to live up to their promises and as regulatory bodies clarified ICO misconceptions, the buzz began to settle.

ICOs were no longer the safe gold mine everyone thought it might be. The complete lack of regulations governing ICOs yielded a lawless environment, letting many “pump-and-dump” schemes take place. But this was just one of many disappointments that ICO investors faced. Many people said goodbye to their money after certain projects or companies found themselves unable to deliver on their ideas. One study suggests that only 44 percent of ICOs are still active within four months of raising money.

Because of these high failure rates, empty promises, and overall unregulated nature, ICOs are falling out of favor while security token offerings (STOs) gain traction as the next generation of blockchain-enabled fundraising.

STOs take the best of ICOs (like their open-door investment policy) and refine it with a stable, legally compliant roadmap. They’re steadily rising to meet the overwhelming desire for a more reliable and controlled equity crowdfunding space.

Regulations to patch the holes

ICOs challenged conventional forms of fundraising and investing by moving it to the blockchain. Then they redefined how quickly companies can raise money. Take the popular messaging platform Telegram, which held an ICO and raised $1.7 billion in one month.

Many illegitimate companies also took part in ICOs. With little more than a white paper and a website, they made amounts of money from eager investors. But despite some bad actors, ICOs were riding high: in 2017, there were approximately 876 ICOs. This growth was impacted when SEC chairman Jay Clayton said that “every ICO I’ve seen is a security.”

Their ultimate demise began as everyone realized they needed to file for exemptions and transition to becoming a security, or else stop doing business outright. Multiple ICOs in the US were fined and some received cease-and-desist letters.

Other countries put ICOs under the microscope to figure out how to regulate them. Canada, Switzerland, and Israel (among others) allowed ICOs as long as they held to strict regulations, but other countries weren’t so kind. Here are the countries that outright banned ICOs:

  • Algeria
  • Bangladesh
  • Bolivia
  • China
  • Ecuador
  • Macedonia
  • Morocco
  • Nepal
  • Pakistan
  • South Korea

This lack of global regulation hurt the growth of ICOs. Without worldwide acceptance, ICOs will fail to make a global impact. But that’s where STOs shine in comparison.

Unlike ICOs, STOs are treated as securities from the start and therefore must abide by a rigorous set of regulations. This makes it much easier for regulators because they don’t have to question whether or not something is a utility or a security.

Here is a short list of the regulatory bodies that are responsible for governing STOs in their respective countries, along with their stance on STOs:

  • Securities Exchange and Commissions (SEC) – United States
    • If a token is deemed a security by the Howey test, it is subject to regulation by the SEC. STOs can file for different exemptions with regulations to the Jobs Act.
  • Canadian Securities Exchange (CSE) – Canada
    • The CSE announced the creation of their own securities clearing and settlement platform on blockchain that will enable companies to issue conventional equity and debt through tokenized securities.
  • Monetary Authority of Singapore (MAS) – Singapore
    • All users of security tokens must adhere to the Singapore Securities and Futures Act. iSToX, a security token exchange which allows investors to purchase tokens with fiat money, is still pending licensing from the MAS.
  • The European Securities and Market Authority (ESMA) – EU
    • There is no EU-wide regulation governing the use and sale of tokens. Some of the smaller states within the EU (like Gibraltar and Malta) have created their own regulatory frameworks to govern ICO-related activities.
  • The Financial Services Agency – Japan

These countries and others are working toward shared ground rules for STOs. This is a step in the right direction, but STOs will thrive once a global set of regulations comes to pass.

Better investment options through STOs

IPOs are the usual way an average person invests in a company, but this system is broken.

The exchange handling their transactions in extremely localized. Many investment portfolios lack international companies because of the geographical limits of current stock exchanges. But STOs can change this by offering investments for all, a truly global exchange.

With a set of global regulations in place, anyone can become an investor. This works twofold: investing now has a low barrier to entry for investors, and this previously unavailable global market is open to companies seeking capital.

STOs are also refining investment opportunities by providing people with the ability to invest in previously unavailable opportunities. ICOs familiarized everyone with crowdfunding on the blockchain, but they lacked concrete investments. ICOs asked investors to give them money in exchange for a future project or service and was only backed by a whitepaper and a promise. This left some investors victims of scams and misrepresentations.

Security tokens are backed by real-world assets. These assets guarantee ownership and individual rights like voting. STO investors are responsible to the company, and the company has a responsibility to them in return.

Who is using STOs to raise money?

Top companies recognize the advantages of STOs for accessing more capital. Consider tZERO, a blockchain subsidiary of Overstock.com. The company makes a fully compliant platform for trading tokens. They held an initial ICO, but after oversight from the SEC, they transitioned to an STO in March 2018. Their STO wrapped in August 2018, and it raised approximately $134 million.

Other companies with decentralized products are also using STOs to raise capital:

  • Gab is a new free speech social media platform that is actively working against censorship, data collection, and siloing. This “neutral platform” raised upwards of $630,000 in under three weeks through their Regulation Crowdfunding (CF) campaign on StartEngine.
  • As an alternative option to popular ride-sharing services Uber and Lyft, Ridecoin is redefining the taxi service with the blockchain, creating a peer-to-peer decentralized transportation system. Ridecoin will connect passengers to drivers without any middleman, so they can afford to pay drivers more and add to the sharing economy. They also let passengers pay more if they’re in a hurry, and less if they’re not in a rush. Ridecoin released both a security token and a utility token to its investors.
  • The Aspen Digital security token is proof that there are no limits to tokenization. Hosted on the Ethereum platform, their security token offers investors an option to get partial ownership in the St. Regis Aspen Resort in Aspen, Colorado. Importantly, this offering is only available to accredited investors under Regulation D Rule 506(c).

STO adoption starts at the top

STOs are only beginning to gain traction as people see the weaknesses in ICOs and grow frustrated with the traditional IPO ecosystem. But there’s a lot of education to be done before STOs gain traction with the average investor. As with any new technology, it’s daunting (and downright scary) until the advantages and usability are clearly laid out.

There are some forward-thinking companies in the securities market who are helping STOs get on their feet. One of these companies is Polymath, a decentralized platform used for the creation of security tokens. They’re helping companies create their tokens, reserve a ticker symbol, and set parameters for their token (like the maximum number of investors and maximum percentage of ownership per wallet address).

A similar platform is the Open Finance Network (OFN), created specifically for security tokens. OFN is backed by a team of securities lawyers and exchange technologists to ensure safe, compliant trading on their exchange.

There are also some other security token platforms specifically focused on investing:

  • Harbor is a blockchain-based platform that is used for private investing in tokenized versions of commercial real estate and investment funds.
  • BnkToTheFuture is similar to Harbor. It’s an online investment platform for qualified investors, with investments focused on fintech.

As more companies see the value in tokenizing investments, security tokens will gain more acceptance and mindshare. Their use of blockchain technology will bring clarity and security to investments so that no one is left in the dark.

With strong regulatory guidelines to protect investors, they’re set to reinvent the future of investing. If 2018 was the year of understanding ICOs, then 2019 will be the year of people getting into them.

In the next post, we’ll dive into the future of security token offerings and why they will become the new global investment opportunity.

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Chapter 5: The State Of Security Token Offerings In 2019

 

ICOs were all the rage throughout 2017 and 2018, but as multiple ICO-backed companies failed to live up to their promises and as regulatory bodies clarified ICO misconceptions, the buzz began to settle.

ICOs were no longer the safe gold mine everyone thought it might be. The complete lack of regulations governing ICOs yielded a lawless environment, letting many “pump-and-dump” schemes take place. But this was just one of many disappointments that ICO investors faced. Many people said goodbye to their money after certain projects or companies found themselves unable to deliver on their ideas. One study suggests that only 44 percent of ICOs are still active within four months of raising money.

Because of these high failure rates, empty promises, and overall unregulated nature, ICOs are falling out of favor while security token offerings (STOs) gain traction as the next generation of blockchain-enabled fundraising.

STOs take the best of ICOs (like their open-door investment policy) and refine it with a stable, legally compliant roadmap. They’re steadily rising to meet the overwhelming desire for a more reliable and controlled equity crowdfunding space.

Regulations to patch the holes

ICOs challenged conventional forms of fundraising and investing by moving it to the blockchain. Then they redefined how quickly companies can raise money. Take the popular messaging platform Telegram, which held an ICO and raised $1.7 billion in one month.

Many illegitimate companies also took part in ICOs. With little more than a white paper and a website, they made amounts of money from eager investors. But despite some bad actors, ICOs were riding high: in 2017, there were approximately 876 ICOs. This growth was impacted when SEC chairman Jay Clayton said that “every ICO I’ve seen is a security.”

Their ultimate demise began as everyone realized they needed to file for exemptions and transition to becoming a security, or else stop doing business outright. Multiple ICOs in the US were fined and some received cease-and-desist letters.

Other countries put ICOs under the microscope to figure out how to regulate them. Canada, Switzerland, and Israel (among others) allowed ICOs as long as they held to strict regulations, but other countries weren’t so kind. Here are the countries that outright banned ICOs:

  • Algeria
  • Bangladesh
  • Bolivia
  • China
  • Ecuador
  • Macedonia
  • Morocco
  • Nepal
  • Pakistan
  • South Korea

This lack of global regulation hurt the growth of ICOs. Without worldwide acceptance, ICOs will fail to make a global impact. But that’s where STOs shine in comparison.

Unlike ICOs, STOs are treated as securities from the start and therefore must abide by a rigorous set of regulations. This makes it much easier for regulators because they don’t have to question whether or not something is a utility or a security.

Here is a short list of the regulatory bodies that are responsible for governing STOs in their respective countries, along with their stance on STOs:

  • Securities Exchange and Commissions (SEC) – United States
    • If a token is deemed a security by the Howey test, it is subject to regulation by the SEC. STOs can file for different exemptions with regulations to the Jobs Act.
  • Canadian Securities Exchange (CSE) – Canada
    • The CSE announced the creation of their own securities clearing and settlement platform on blockchain that will enable companies to issue conventional equity and debt through tokenized securities.
  • Monetary Authority of Singapore (MAS) – Singapore
    • All users of security tokens must adhere to the Singapore Securities and Futures Act. iSToX, a security token exchange which allows investors to purchase tokens with fiat money, is still pending licensing from the MAS.
  • The European Securities and Market Authority (ESMA) – EU
    • There is no EU-wide regulation governing the use and sale of tokens. Some of the smaller states within the EU (like Gibraltar and Malta) have created their own regulatory frameworks to govern ICO-related activities.
  • The Financial Services Agency – Japan

These countries and others are working toward shared ground rules for STOs. This is a step in the right direction, but STOs will thrive once a global set of regulations comes to pass.

Better investment options through STOs

IPOs are the usual way an average person invests in a company, but this system is broken.

The exchange handling their transactions in extremely localized. Many investment portfolios lack international companies because of the geographical limits of current stock exchanges. But STOs can change this by offering investments for all, a truly global exchange.

With a set of global regulations in place, anyone can become an investor. This works twofold: investing now has a low barrier to entry for investors, and this previously unavailable global market is open to companies seeking capital.

STOs are also refining investment opportunities by providing people with the ability to invest in previously unavailable opportunities. ICOs familiarized everyone with crowdfunding on the blockchain, but they lacked concrete investments. ICOs asked investors to give them money in exchange for a future project or service and was only backed by a whitepaper and a promise. This left some investors victims of scams and misrepresentations.

Security tokens are backed by real-world assets. These assets guarantee ownership and individual rights like voting. STO investors are responsible to the company, and the company has a responsibility to them in return.

Who is using STOs to raise money?

Top companies recognize the advantages of STOs for accessing more capital. Consider tZERO, a blockchain subsidiary of Overstock.com. The company makes a fully compliant platform for trading tokens. They held an initial ICO, but after oversight from the SEC, they transitioned to an STO in March 2018. Their STO wrapped in August 2018, and it raised approximately $134 million.

Other companies with decentralized products are also using STOs to raise capital:

  • Gab is a new free speech social media platform that is actively working against censorship, data collection, and siloing. This “neutral platform” raised upwards of $630,000 in under three weeks through their Regulation Crowdfunding (CF) campaign on StartEngine.
  • As an alternative option to popular ride-sharing services Uber and Lyft, Ridecoin is redefining the taxi service with the blockchain, creating a peer-to-peer decentralized transportation system. Ridecoin will connect passengers to drivers without any middleman, so they can afford to pay drivers more and add to the sharing economy. They also let passengers pay more if they’re in a hurry, and less if they’re not in a rush. Ridecoin released both a security token and a utility token to its investors.
  • The Aspen Digital security token is proof that there are no limits to tokenization. Hosted on the Ethereum platform, their security token offers investors an option to get partial ownership in the St. Regis Aspen Resort in Aspen, Colorado. Importantly, this offering is only available to accredited investors under Regulation D Rule 506(c).

STO adoption starts at the top

STOs are only beginning to gain traction as people see the weaknesses in ICOs and grow frustrated with the traditional IPO ecosystem. But there’s a lot of education to be done before STOs gain traction with the average investor. As with any new technology, it’s daunting (and downright scary) until the advantages and usability are clearly laid out.

There are some forward-thinking companies in the securities market who are helping STOs get on their feet. One of these companies is Polymath, a decentralized platform used for the creation of security tokens. They’re helping companies create their tokens, reserve a ticker symbol, and set parameters for their token (like the maximum number of investors and maximum percentage of ownership per wallet address).

A similar platform is the Open Finance Network (OFN), created specifically for security tokens. OFN is backed by a team of securities lawyers and exchange technologists to ensure safe, compliant trading on their exchange.

There are also some other security token platforms specifically focused on investing:

  • Harbor is a blockchain-based platform that is used for private investing in tokenized versions of commercial real estate and investment funds.
  • BnkToTheFuture is similar to Harbor. It’s an online investment platform for qualified investors, with investments focused on fintech.

As more companies see the value in tokenizing investments, security tokens will gain more acceptance and mindshare. Their use of blockchain technology will bring clarity and security to investments so that no one is left in the dark.

With strong regulatory guidelines to protect investors, they’re set to reinvent the future of investing. If 2018 was the year of understanding ICOs, then 2019 will be the year of people getting into them.

In the next post, we’ll dive into the future of security token offerings and why they will become the new global investment opportunity.