Security Token Offerings (STOs) are emerging as powerful tools that can transform the investment landscape.
DX.Exchange, a crypto exchange is already bringing this advantage to investors.
The general interest in cryptocurrencies picked up with users trading in Bitcoin (BTC), however, Ethereum changed the scenario. The Ethereum platform with its’ smart contracts enabled many blockchain start-ups to offer decentralized and innovative business models.
These start-ups needed to raise funds. The Initial Public Offering (IPO) route isn’t practical for them since they don’t have the established track record. Venture Capital (VC) funding is an option, however, a VC raise takes time due to its’ stringent filtering process. Start-ups also need to cede some control to VC investors.
Blockchain start-ups embarked on a novel method of fundraising called ‘Initial Coin Offerings’ (ICOs), which democratized investment. Start-ups could create their website and a whitepaper. They either created a prototype of their platform or stored their open-source code in GitHub.
They didn’t go through regulatory requirements. They didn’t offer any stake in their companies. With their digital marketing, they reached a wide global audience. Anyone could invest, and many did! ICOs raised billions of dollars in 2017, and in the first 3 months of 2018, they surpassed the 2017 raise!
It all looked too rosy, except, unscrupulous players soon entered the scene. ICOs operated outside regulations. Retail investors were now exposed to high-risk investment instruments without the necessary ability to mitigate such risks. They had no legal recourse either since no regulators watched over ICOs.
Reports soon emerged showing how the majority of ICOs were scams. Regulators stepped in, with their mandate to protect investors. In the USA, Securities and Exchange Commission (SEC) started a comprehensive probe into ICOs.
The probe has a wide scope. SEC found that many start-ups sold utility tokens claiming that they are only providing access to a platform with their tokens.
However, they also promised future profits to their prospective investors. These promises categorize their tokens as securities investment contracts, however, these start-ups didn’t comply with securities regulations.
Securities regulations have stringent registration, reporting, and disclosure requirements. Only accredited investors can buy securities investment contracts, which have very limited liquidity. These are high-risk investment instruments, therefore, SEC regulations are designed to protect retail investors.
SEC found most start-ups actually sold securities without complying with these regulations. They took a range of actions as a result of their probe. These included ‘cease and desist’ orders, whereas in some cases settlements were done.
The investigations have significantly reduced the ICO activities, consequently, start-ups are now coming up with new methods of fund-raising. This where STOs enter the landscape.
A start-up issues security tokens in ‘Security Token Offerings’ (STOs) after fully complying with securities regulations. There are tangible assets that back these security tokens. Only accredited investors can buy them at first, however, they can sell them later in secondary markets, thereby improving liquidity.
There are several advantages to STOs. They can attract a global audience, moreover, compliance with regulations remove apprehensions. The power of the blockchain technology helps expressing tangible assets as crypto tokens. This makes trading, settlement, etc. faster and cheaper.
Any tangible asset can be converted to security tokens, for e.g., real estate, stocks, etc. This can improve the efficiency of trading these assets. The potential market for security token offerings is large, amounting to trillions of dollars!
Estonia-based DX.Exchange has already ventured into security token offerings. They are now allowing investors to buy security tokens that represent shares of Apple, Tesla, Facebook, and Netflix as security tokens.
Indiegogo is another crowd-funding platform that has ventured into security token offerings and has met with some success. Will STOs transform investment as we know? Watch this space for more exciting news on this.