There was a time when Crypto fundraising was synonymous with Initial Coin Offering or ICO. However, the boom seems to have faded into obscurity and oblivion, its demise being fuelled by significant instances of scams.
What made ICOs fail?
It is probably the lack of regulation that was one of the biggest reasons why ICOs suffered the downfall. The lack of oversight and then non-involvement of governmental bodies made it quite susceptible to malicious acts by hackers and fraudsters.
What was the guarantee of security?
The answer probably lies in the question itself! It is all about security.
At this juncture, we should understand what security is. The Howey Test defines security as a financial transaction-instrument where the money is invested and the investor expects profits. The investment should be made in a common enterprise. The profit generated can, or rather, is bound to involve the efforts of the promoter. However, the promoter’s actions should not directly influence the profits with malicious intent, or for manipulating the possibility and magnitude of profits.
To counter the fraudulent activities that were prevalent in ICOs, Security Token Offering (STO) came into existence. STOs are quite similar to an ICO but not congruent. The technology, the depth of knowledge and smart contracts it takes to create an STO is far greater. The ‘security’ in the STO is not murky as in the ICOs. ICO tokens, which were considered as securities by the SEC, were no longer given that privilege.
The very presence of the term ‘security’ draws it under the umbrella of regulatory bodies like the Securities and Exchanges Commission (SEC). This will ensure that the interest of the investors is protected at all costs. Also, the requirements like KYC/AML (Know Your Customer/Anti-Money Laundering) and Accredited Investors will ensure that only the verified investors are able to participate.
Qualities of an STO:
STOs, unlike ICOs that issue utility tokens, represent a form of security. It means that these tokens are backed by real assets that entitle the possessor to ownership of stocks or equity or trading rights or a combination of these.
To enforce the ‘security’, there have been norms that have been constitutionally set up to govern the eligibilities of those who will invest in an STO
In the United States, securities can be offered to accredited investors. The accredited investor is someone who earns over $200,000 per annum or has a net worth in excess of 1 million dollars. This would mean that STOs could be out of access for most people, and this inaccessibility has contributed in the ICOs still retaining the number one spot when it comes to contributing to crypto projects. There are a few rules like the SEC Rule 506(b) that provides exemptions under which securities can be offered for up to 35 non-accredited investors
Different Types of Securities:
In the evergreen words of George Orwell, not all Securities are created the same. In the United States, there are debt securities like bonds, equity securities like stocks and derivatives like futures contracts. In the United Kingdom, there are a lot more options including pensions, warrants, debentures, and government securities.
What defines security?
There are different kinds of securities but there are a few similarities as well. The security should have a monetary value and should be tradable. The security could also have contractual rights attached to it like company shares. Above everything, it should be registered with the financial authority of the country from which they are issued.
Creating an STO
Creating an STO is a lengthy process compared to an ICO, but quite swift compared to traditional securities. Since the responsibility of protecting the interests of the investors falls on the SEC, the organization validates the company that is listing its tokens. This process ensures that no fraudulent companies are listed and the investors do not lose their money.
Blockchain Developers, with its understanding of the markets and the legal frameworks across the world, help you create your own STO.