Security Token Offerings

Security Token Offerings – I

STO – security token offerings are recently getting very popular which is a development all crypto investors and enthusiasts need to be aware of. They have wider ramifications around another key trend happening in this space towards asset tokenisation which I will cover in future.

We have all heard of ICO’s – which are initial coin offerings. ICO’s are the medium via which many companies offered their coin (designated as an utility token to participate in a platform or obtain services) to the general public. This resulted in the ability for many companies & individuals to raise money with a white paper and idea, you can read some statistics for 2018 here around money raised in ICO’s [2] – the process being much less onerous than the traditional methods to raise funds. So investors, enthusiasts, entrepreneurs and speculators have all jumped into this space. Such easy access to money was bound to attract a few fraudulent ventures as well, plenty of scam stories available on the internet if you wish to research.

This obviously has left some key stake-holders in the world concerned, albeit for different reasons. The regulatory agencies whose remit include protecting investors started getting active — I will focus on trends from US [4],[5]. The SEC chairman, who is actually quite positive about the potential of Distributed Ledger Technologies has many a time voiced his opinion that applying some of the current criteria they have for securities definitely flags many ICO’s as one. He has also expressed disappointment that traditional gate-keepers (advisors) have not up-held the standards the government expected from them focussing more on semantics and definition behind ICO offerings for compliance while ignoring the spirit behind the regulatory framework. There is a different kind of concern among established investors who saw ICO’s pulling more money than some of the traditional Venture Capital or similar fund raising avenues. The established VC, P/E firms are looking at this growth and looks like they have a growing level of participation too via private sales — they would want to make sure that they can evolve along with this new order [1]. Of course the nature of ICO’s today mean that more traditional Institutional investors are also wary of risking their client’s money in this space.

Enter STO – a security token offering that will be compliant with existing laws and regulations around securities [3]. Each token issued creates an obligation for the company to the token holder providing them with some level of ownership on company’s assets and income, basic protections and will be compliant in the jurisdictions where they would be established and traded. It solves some of the regulatory uncertainty helping with compliance while attracting investors who would prefer the certainty of holding security tokens that offer them a similar experience to their dealings in equities and bonds. This is still a new space, so watch out for more developments here.

In Part II I will cover more around what does the jurisdictional aspect mean and how would tokens be available / accessible and some of the finer points of compliance with regulations.

Thanks for reading.


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