We’ve come a long way since the Dutch issued the first initial public offerings (IPOs) in the seventeenth century. With the advent of crypto-currency, companies and corporations have new channels to access capital from markets and investors. Crowd-funding, for instance, is now a viable option for companies seeking capital across sectors.
Crypto-currency in itself has evolved and given birth to initial coin offerings (ICOs), a new spin on the legal concept of the IPO which is essentially a subset of investment contracts. As a digital version of investment contracts, ICOs enable the promoter/entrepreneur to offer a digital token of ownership for use in a future platform still in development. In return, the promoter/entrepreneur gets access to liquid finances to develop a platform where ICOs can be traded. It is for this reason that the investment community refers to ICOs as ‘token offerings’ powered by blockchain technology.
While ICOs have emerged out of the IPO concept, there remain notable differences between them. ICOs are thought to have function and utility embedded within the platforms and protocols an entrepreneur/promoter uses them to finance. They address two basic needs in capital markets—first, the need to circumvent restrictive policy controls and second, the need to disaggregate risks in financial markets by distributing the risks from capital investments among the masses. Unfortunately, however, ICOs have dismal survival rates due to the uncertainty built into the design of the offering. Murky trading practices and unregulated exchanges make it vulnerable to fraud and malpractice.
From ICOs to STOs: Getting Security Right
With the arrival of security token offerings (STOs), security is not nearly as much of an issue as before. This is partly because of the use of blockchain technology towards building and maintaining STO offerings and platforms. Blockchain social ledgers and distributed computing applications introduce resiliency and transparency to any form of social or business transactions by making them tamper-proof and available to all stakeholders in the space. The same principles apply for STOs, only that they are a more targeted application of blockchain and addresses security concerns that went hand in hand with ICOs.
Clearly, security token offerings (STOs) differ from preceding solutions in the crypto-currency investment domain for not only being a ‘programmable investment asset’ generated by blockchain technology but also for having significant compliance and oversight measures incorporated within it. This makes security token offerings (STOs) at par with stocks being traded on listed stock exchanges.
STOs do in fact need to be listed with the Securities and Exchanges Commission (SEC). Despite the use of blockchain technology, they have to be SEC compliant and have KYC features built into them and the exchanges where they are traded. The SEC regulates STOs across two different parameters—the eligibility of investors based on income and wealth ownership and restriction on the amount of finance an entity can raise from the market in a term. Ultimately, however, the beauty of security token offerings (STOs) is that they bridge companies and liquidity-seeking investors, forcing them to mature and deliver stability and consistency to the digital capital offerings market.
The Path Forward: Weighing Out the Options
At the end of the day, both ICO and STO instruments have their share of pros and cons. ICOs offer variability of use, quick liquidity and massive gains in value over short stretches of time, whereas security token offerings (STOs) provide stability and a reasonable level of protection for the investor. While there are low barriers of entry for ICOs in capital markets, the same is not true for STOs. The latter requires specific skills and processes for SEC compliance and legal management in trading and transfer. Thus, STOs might not be as easy to implement for small firms and startups and can lock out outliers from capital markets.
MagicBlockchainQA can bring unique value to entrepreneurs and promoters in the STO space by leveraging its extensive blockchain experience. MagicBlockchainQA endeavors to strengthen the STO ecosystem making it easier for companies to launch their security token offerings (STOs) by aggressively partnering with major STO platform organizations. MagicBlockchainQA can provide development, blockchain testing, security auditing, legal and advisory services.