The research results of Autonomous Research showed that since the beginning of 2018, the activity in the Initial Coin Offering (ICO) has declined by more than 90%. The reasons are fraudsters and pressure from the SEC. Only STO can return confidence to the market.
Security Token Offering (STO) is a simple, secure and legitimate ICO response. Legal, because companies are registered with the SEC. Secure, because the crowdsale is still protected by a distribution registry, cryptography and smart contracts. Simple, because nothing changes for investors, and issuers only need to spend a little time on registration.
According to experts of the blockchain platform Polymath, the volume of investment in security tokens in 2020 will reach an impressive $ 10 trillion. Then we will talk about the benefits that will allow STO to achieve such a great success.
1: Intrinsic value
Unlike utility tokens, which are designed exclusively for accessing the service or product of the blockchain platform and have no other value in their own right, security tokens are digital certificates that give ownership to:
● direct or indirect participation in the management of the company;
● virtual or physical assets: money, oil, cocoa beans, etc.;
● company property or its share;
● share of the profit of the issuing company;
● credit commitments;
● dividend payment.
All these are real things that are valuable in themselves, since they can be sold on the market without being tied to the issuer or provide an opportunity to participate in the process of generating profit. At the same time, the price of certain types of security tokens, for example, giving the right to physical assets, does not even depend on the success of the crowdsale and the achievement of the goal for which they collect money.
Thus, security tokens are of much greater value for their holders, since they carry less risk – the failure of a tokensail or startup leads to the automatic devaluation of utility tokens, since they are not applicable anywhere else.
In addition, security tokens are intended solely for the investment benefit of their holders, and not for any useful action: participation in production or consumption. From an economic point of view, such assets are more efficient, since they do not “bind” a useful resource. That is why grain, animal skins and olive oil are no longer used as a means of payment.
Examples of crypto coins that carry intrinsic value:
● dividends pay out tZERO, LXDX, FIN;
● the right to assets give Tether (dollars), Orebits (gold), CEDEX (diamonds);
● right to share give DESICO, MET, HFBB and LupusCoin.
2: More legitimacy
Many investors and large companies that would like to make an initial offering fear that government regulators will consider ICO an illegal way to raise funds. Which is largely the case, since the activity of such startups is really not regulated at all, which is why 80% of the ICO is a scam and fraud.
For example, in the middle of November 2018, the SEC published a report in which it was reported that two companies – Paragon Coin Inc. and CarrierEQ Inc. (Airfox) – carried out an illegal fundraising with the help of ICO. They sold security tokens to investors without registration, because the SEC obliged them to:
● register tokens in accordance with the Securities Act 1933;
● provide SEC with reports on its activities during the year;
● pay a fine of 250,000 US dollars;
● pay damages to all investors.
And this is just a drop in the bucket. So, only in October 2018, the SEC sent letters to 80 organizers of the ICO, who are suspected of unregistered emission and sale of security tokens. Some organizers, for example, ICO Centra were even arrested for this reason.
Fundraising with the help of STO on this background looks much more attractive, since this type of crowdsale involves registration with the SEC. Consequently, after the completion of the initial placement, no official will come to the office of the company and will not say that you are a criminal and must pay a large sum to the treasury, and possibly go to jail.
For investors, this is also a big plus, since registering with the SEC reduces the risk that the company will be a fraud. The regulator, before giving permission, checks the issuing company in ways that are not available even to the most successful investor, since he does not have access to the tax, fiscal and other services databases. Every ICO must has its own professional White Paper.
3: More transparency
Registration in the SEC also provides other benefits for investors. The main one is the disclosure of information about the company: the state of the assets, the management structure, financial results and risks for investors. Thanks to this, you can conduct your own investigation and verify the professionalism, efficiency and fairness of the issuing company.
In the long run, this will lead to such consequences:
● sensible capital accumulation by issuing companies;
● isolation of investors from fraudsters and inefficient companies;
● establishing chaos in the market, as there will be general open rules for all participants.
Of course, registration with the SEC does not guarantee the receipt of investment profits, but at least it confirms that the company is valid and the rights of investors will be protected in case of fraud. When collecting funds with the help of ICO, there is no such thing to say – anyone can launch an ICO while he has no legal obligations to investors.
4: More liquidity
Implementing blockchain technology and creating security tokens will make it possible to liquidate traditionally illiquid assets, such as works of art, real estate or rare cars. Now they can only be owned by people with large capital.
This became possible due to the fact that any asset can be tokenized – to divide ownership into thousands or millions of “digital” certificates – tokens. After that, the tokens can be sold as one person or organization, and a thousand or a million people.
For example, if you take Leonardo da Vinci’s “Savior of the World” painting, which was sold in 2017 for $ 450 million, and tone it up by creating 1 million tokens, then an ordinary investor would need only $ 450 to become its co-owner. Similarly, you can do with real estate in Manhattan, which is worth millions of dollars, or with the construction of an island in the Mediterranean.
You may think that this method of investment is comparable to investments in investment fund shares, for example, a real estate investment trust (REIT), but it is not. Tokenization gives you much more flexibility, because tokens can be sold on exchanges like currencies, and participation in funds is associated with bureaucracy, permissions and restrictions.
Cases are already available. For example, you can become a co-owner of works of art in the first decentralized Maecenas art gallery. She has already tokenized such works of art as the «14 Small Electric Chair» (1980) and the other part of the Andy Warhol “Reversal” series. The last item is estimated at 5.6 million dollars.
Another example is the «digitizing» of a $ 30 million condominium in Manhattan. The East Village building, each of its 12 apartments occupying 1,700 square feet, is now “located” on the Ethereum blockchain, and anyone can invest in it anywhere in the world.
You can also mention the venture capital fund SPiCE, which was one of the first to decide to tokenize its business in order to give its investors more autonomy and get even more capital for investment.
5: Ability to recover / return
Anyone who is even slightly familiar with cryptocurrency knows that if your bitcoins were sent to the wrong wallet, to an empty address, or they were stolen, it is impossible to recover or return these coins. This is one of the main barriers in the investment market for virtual assets.
However, a properly programmed STO can provide an opportunity to return lost or stolen tokens if their owner passed the verification and they were sold on the market without his participation. Now, this function is practically not used, because you need to work out a lot of details that will eliminate fraud on both sides. However, the mere fact of having such an opportunity is better than its absence.
In reality, the reissue of securities takes place in a process called an affidavit. In the world of cryptocurrency, it is implemented only on Token IQ platform – a blockchain platform for launching ICO / STO in full compliance with US law.
There is no doubt that in the future all blockchain platforms focused on STO will introduce such a function, since investors want it. And since verification through KYC / AML procedures already obliges to identify all investors, and distributed registry to track lost or stolen tokens – to find and return stolen or lost will be easier.
6: Access to global markets
Buying tokens is a fairly simple action. It is enough to register on the STO website and transfer bitcoins, broadcasts, dollars or other means of payment to the purse of the crowdsale initiators. A few minutes are enough. In this case, anyone can participate, regardless of the current location, citizenship or religion.
Difficulties can only arise in terms of KYC and AML procedures. Back in 2017, the SEC demanded that all blockchain startups comply with these procedures in order to exclude white washing, terrorist financing and identity theft.
However, these difficulties can be circumvented if you use such platforms as KYC Legal and ICO Pass. With their help, get a digital ID, which is used when you need to check KYC. There are no such sites for the AML procedure, but it is rarely required.
Due to this and the simplicity of buying tokens, the target audience of any STO can include citizens from all over the world, the main thing is to remember to translate the website into the desired language. This means that the initiators of the crowdsale gain access to global markets without any additional conditions. That is why Polymath predicts the growth of this market to 10 trillion dollars by 2020.
7: Efficiency and scalability
Blockchain technologies along with smart contacts can remove most of the paperwork and inefficiencies in the investment market. Here are some of the processes that will improve thanks to the tokenization of securities:
● automation of KYC / AML procedures – no need to spend money and time on checking each client;
● reduction of dependence on lawyers – most of their work can be “entrusted” to smart contracts;
● reduction of costs at issue due to elimination of intermediation of banks;
● cost reduction by reducing working staff;
● vote on “digital” power of attorney;
● simplified accounting and auditing processes;
● automation of dividend payments.
Besides, the tokenization of securities will provide more accurate data on the status of both the market as a whole and its individual participants. What will allow you to track financial results, accuracy of calculations, the status of documents in real time, with all market participants or a separate platform.
This will reduce the risks for all market participants and in the long run will create a new rating system that will show which company is reliable, which investor is successful and which developer is a scammer.
Comparison of ICO, STO and IPO
First. STO is at the development stage, so now it is difficult to assess the full potential of this form of crowdsale. For example, with the help of STO you can finance the recording of a music album and, if successful, automatically receive dividends from its sales. Another example is the financing of the construction of a paid highway or bridge. Previously, such projects could be carried out only by states and large companies.
And these are the simplest examples, as concepts are already being developed that tone up the personal data of people, intellectual property and even the process of colonization of Mars. No one knows how to evaluate such things from an economic point of view. But it is precisely known that from the technical point of view – it can be realized already.
Second. So far there are no laws that regulate the cryptocurrency market and STO. There are general provisions for the securities market as a whole. They are more or less loyal to the initial offer of security tokens, so companies can use STO to finance their projects.
However, regulators may at any time introduce additional rules specifically for this market, which may make it unattractive for both investors and issuing companies. The probability of such a scenario is small, but this must be remembered. And different countries may respond differently.
For example, the popular Uber service works freely in most countries of the world, but it has been banned in Bulgaria, Hungary and China. In the UK, Spain and France, Uber works, but with great restrictions that level some of its advantages. Judging by the reaction of countries to cryptocurrency and ICO, STO may suffer a similar fate.
Third. Registration with the SEC makes it possible to judge whether the issuing company works within the law, but this does not say anything about the likelihood of success. Participation in STO, as in the case of IPO and ICO, is a highly risky investment. If an investor loses money because of the failure of the project or its failure – this is the failure of the investor. Money can be returned only in case of fraud and manipulation.