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Three things every investor should know about Security token Offerings

 

Security token offerings

Emerging from the ashes of the unregulated fundraising method known as Initial Coin Offerings, came Security Token Offerings. Despite STOs being relatively new to the blockchain-crypto market, they have managed garner the attention of investors and startups alike.

Why? Because STOs could be considered as an improved version of an ICO with some noteworthy differences.

#1 The fall of ICO and the rise of STOs
The stakeholders in an ICO project receive utility tokens in-return for investing capital in that project. The company management then uses this capital to develop their project and once mature, bring it to market. Stakeholders can now use their utility tokens to gain access to the project’s product or service. In essence, that’s the ICO model of fundraising! And it was revolutionary when compared to traditional fundraising mechanisms like an IPO or VC funding.

But ICOs fell from their high just as quickly as they rose to fame. What’s the reason? There are a few actually, and together they inadvertently caused the downfall of ICOs.

For starters, the ICO space was largely unregulated, which attracted many bad actors wanting to take advantage of it. Investors lost an inordinate sum of money to fraudulent ICO projects.

How much?

At least a $100 million, according to a report by Diar. Prompted by these events, regulators like the SEC in the United States, started cracking down on ICO projects with “cease and desist” orders by citing most ICOs were in violation of Federal securities law. For better or for worse, most public ICO projects in the US are now being considered as security offerings by the SEC.

The unfavorable regulatory environment combined with the skepticism among investors came together to bring down ICOs.

As startups searched for a new way of fundraising that was compliant with regulatory norms came the notion of a security token offering.

#2 What are security tokens?
In essence, security tokens are a novel digitized form of traditional financial securities like stocks or bonds. They are tokens that are tokens backed by real-world assets. For example, a security token would just replace your regular stock paper with a digitized form, it’s as simple as that.

There are several advantages to security tokens, let’s go through a few of them-

  • Security tokens are inherently compliant. Why? Two words-smart contracts. A smart contract is just a simple computer program that is coded to execute once certain conditions are met. These conditions can be regulatory compliance, KYC norms, etc, which makes it impossible for security tokens to be sold without compliance.
  • Increased liquidity as a result of enhanced trading of security tokens. As security tokens are digitized they can be traded on global trading platforms almost instantly. This was virtually impossible with traditional securities.
  • As security tokens are an improvement to traditional securities, as they are built on a blockchain network, they are decentralized and trustless. As a blockchain network is an immutable digital ledger of transactions, thus security token transactions on a blockchain network don’t have to be verified by a trusted third party. Cutting out the need for middlemen, thus increasing efficiency and transparency.

#3 Security Token Offerings are booming

While ICO numbers have dwindled significantly over the past few months.The number of ICOs being launched dropped by a severe 52% during Q1 2019. STOs, on the other hand, have been booming!

# of STOs, quarter-wise

Security token offerings

Source



The number of STOs has observed a meteoric rise during Q1 2019, reaching a historic high of 47 STOs, according to InWara’s STO report. This is a 130% increase than when compared to the previous quarter. A likely reason that can be attributed to the meteoric rise, as mentioned earlier is because of the increased pressure from regulators.


While the downfall of ICOs has been severe and tragic, looks like security token offerings are here to stay.