STOs or the Security Tokens are the new poster boys of the digital currency market. Given the US SEC crackdown on several ICOs after their phenomenal run in 2017, this is perhaps the next big thing in the crypto market. Close to 90 STOs are being release planned for 2019 in comparison to just 2 in 2017 and 25 in 2018.
Startups are playing it smart this time. Given the regulator’s stance on it, they plan to play it safe, by the book and offer these tokens only to accredit investors or high net worth individuals. This way, they can avoid quite a few regulations meant for protecting the rights of an average retail investor.
What Went Wrong With ICOs?
Initial Coin Offerings or the ICOs raised over $20 billion in 2018. Their monthly investments reached close to $6 billion levels, but then it all crashed by December of this past year over and losses across the board were in the 90%+ range. Declining Bitcoin and Ethereum prices surely had a significant impact on ICO valuations but so did lack of user adoption and declining retail investment interest.
The US Securities Exchange Commission also played a role by going after several of these new coin issuers flushed with the ICO cash. The US SEC pointed out that ICOs must register as security offerings and guarantee certain levels of investor protection. In turn, ICO’s tried escaping the SEC wrath with the argument that these were utility tokens and not securities. Essentially arguing that the buyers could use these to pay for services provided. The SEC obviously did not agree with this sentiment and did not change its guidelines.
What Is An STO And Is It Better Than ICOs?
Technically, the STOs are very similar to other crypto currencies with a slight distinction. STO’s main difference lies in being backed by a specific asset class while most crypto currencies derive their value from market participants. The assets backing STO’s can be anything from real estate to debt or even equities in a company.
This entails that these digital assets come under the purview of the securities law. The 1993 Securities Act allows limited issuance of these securities to only accredited investors. In simple terms, it means these can be only offered to investors of certain net owrth. So it is not as easily tradeable or available as you had seen in case of ICOs. It is slightly more exclusive and has fairly limited exposure in terms of the investor base.
What Are Regulation Benefits & Structure?
So the question is, how can startups that are in the field to raise money benefit from this. The first and most important keyword in this is accredited investors. In extremely simple terms, this takes the STO immediately off the rigorous SEC watch. The SEC rules are primarily meant to protect the interests of the retail investors and by not selling securities to this investor type, STO’s bypass a lot of the requirements that are enforced by the SEC. The STOs with their current structures don’t have to go for the cost registration that is compulsory for most initial public offerings and the restrictions that have recently been enforced upon ICO’s.
Most STO’s can only offer the sale documents to a maximum of 99 potential investors. The investors have to provide identification and abide by a certain lock-in period before they can sell these security offerings. The issuers also have to check for potential fraud/money laundering by the buyers and must disclose certain information at regular intervals.
Are STOs Worth The Risk?
So then we arrive at the key issue, are the STOs worth the risk? Should you put your money in these? Analysts are cautious and many feel that these might be another of those schemes that leave the investors high and dry at the end of the day. It is an extremely risky proposition, even without the flux that the cryptocurrency market is in at the moment. What makes the deal even more worrying is that most crypto exchanges do not sell these.
Verdict: We’d stay on the sidelines for now.