There are different ways of fundraising: venture capital, crowdfunding, ICO, IEO, STO with certain pros and cons. Finrazor and Monetizr, a project that preferred the STO campaign to an ICO, suggest to dive in the 'security token offering' concept and have a closer look at its features
STO (Security Token Offering) is means of fundraising on blockchain, where instead of selling utility tokens for service or product being under development or used as cryptocurrencies, security tokens are sold for accredited investors, meaning that they buy something that could be compared to traditional shares in a company with securities. Like traditional dividends but with higher liquidity.
What an STO essentially is
— There are certain features of an ICO: a whitepaper, actual tokensale, listing on exchanges ('when-Binance' time), tokens’ type issues... So, let’s compare STO and ICO and point out their differences and similarities.
STO’s core features are:
- SEC compliance,
- availability only for accredited investors...
- … as financial instruments
Similarities: both provide investment liquidity and community development, [which essentially depends on many factors from product quality and relevance to marketing strategy].
Both ICO and STO imply a whitepaper and tokensale (in ICO's case token are referred to mainly as a commodity, for future transactions and application; but in STO's case the are more similarities with more traditional shares).
Also it takes time to set up the campaign. Although there have been cases like Useless Ethereum Token where most is likely to be set up by one person (and is still managing to rise over 200k in contributions), serious ICO and STO campaigns takes from 6 to 12 months of pre-public engagement to set up.
Differences: almost anyone can participate in an ICO while STO are reserved for professional investors' community. ICO is generally lacking alignment between the issuer and the receiver, KYC/AML compliance and don’t have regulatory oversight – all things STO have.
— What problems of an ICO do not exist at an STO?
In 2017 crypto world was like a wild west. There were honest campaigns and scams, hacking homepages and redirecting investments into accounts that does not belonged to token issuers. Now ICO is better regulated but utility tokens still lack securities, investors have no rights or protection, making future perspectives unclear. For example, if token sale page is not set up right, it’s easy to steal or loose the tokens, and investors also might face legal risks.
When rolling out an STO, issuers don’t have to invent a use case for the token [at the very beginning of the fundraising process. Utility tokens can be issued later — ed. comment]. STO is a mere financial instrument, backed by an asset (some equity in company, for instance). Also, investors have clearly defined rights in company they invest in, like dividends, voting, etc.
— And where an ICO is easier?
ICO doesn’t have securities. It means that in order to do ICO fundraising, companies don’t have to go through all the legal processes to get them approved, [which takes a lot of time and efforts, and sometimes include bureaucracy].
STO's place in the crypto ecosystem
— People know a few about STO. Is this a problem?
At the beginning only a handful of people knew about cryptocurrencies and even fewer had them. Now according to Dahlia Research 3 out of 4 people have heard about cryptocurrencies and on average according to Statista 8.4% people worldwide own some cryptocurrency.
STO is a relatively new term that took shape in 2017 when companies, investors and regulatory bodies started to look for an alternative to ICO. It is forecasted by NASDAQ that in 2019 Wall Street will belong to the security token. More information on the topic should accumulate naturally as it did after cryptocurrencies were launched and first ICO fundraising opportunities introduced.
— Where do you announce your STO, among ICOs?
STOs are announced much like ICOs are, but typically an STO is a more private offering, because it addresses accredited private investors, VC funds and family offices.
From the investors' perspective...
— How does the process of investment differs from ICO?
The participation process is similar to an ICO. There is a security token sale platform where investors register, go through the documentation and sign the investment documents and after that note the token wallet address where they wish to receive the security tokens.
Of course, the biggest difference is that security tokens represent a part of the company which investors invest in. They also provide dividends, voting rights, and other benefits, historically only available to a company's seat of management.
- The company is obliged to be registered within the SEC. The regulations differ depending on the type of offering (e.g. Reg D or Reg A or Reg A+);
- There are specific requirements on reporting for the companies (this depends on the offering type);
- Clarified investors' protection and rights;
- Sometimes there is no public solicitation.
—What about KYC and AML?
That is one of the biggest STO bonuses — they are KYC/AML compliant and transparency is required from all [parties] involved.
— How does an STO treats its investors, like or unlike ICO?
Most importantly — in STO investors have rights to profit from the company as it grows and is provided with clear, transparent future opportunities. It’s important to remember that in STO only accredited investors and companies can participate, while ICOs are available almost to anyone. STOs provide investors with dividends, equity in the company and/or voting rights — all the things that ICO cannot deliver because of their lack of securities.
— How do they use tokens?
In ICO campaigns there are utility tokens — they can be used as payments for some services or products from issuer, or they can be traded.
STO use security tokens which are a proof-of-investment/ownership case, and investors cannot use them to pay for products or trade them, but the tokens provide liquidity, dividends, equity in company and other securities that ICO is lacking.
Monetizr is a blockchain Game Reward Engine. It’s the first tokenized system — across the crowded and fragmented $100 billion gaming industry — that benefits gamers, game developers, and brands — without compromising the user experience.
Central to this platform is the MTZ token. Gamers can earn MTZ tokens in three ways: by playing (based on time), by unlocking achievements (based on skill), and by mining cryptocurrencies using the unutilized computational power of their devices.
— Why did you decide to launch an STO?
Monetizr is B2B. Although our final product is for consumers, it is distributed by game studios. It was a logical choice to talk to investors rather than masses. Also, running an STO does not mean that utility tokens cannot be later on airdropped to the community or users if they are useful or necessary for the protocol or dApp. There is a clear distinction between the investment and the product.
— Where did this choice already help?
The regulatory process is much more complicated when one is getting compliant with all STO requirements. But it has obvious benefits once the process is completed: if you're an STO, it shows the investors that the project is a serious company with plans for future and actual working product, not something still under development. [Unfortunately, due to scam reports there is a the negative focus on an ICO itself, and even decent products while having an ICO, suffer from the effect — ed. comment]
Currently, STOs can't hold the candle to ICOs as in ICOs everyone can take part in while STOs are for the investor community only.
There is a myth that STOs are currently only available for companies registered in the USA, but it is not true. Actually, STOs are available for companies in various jurisdictions, and also investors from most countries are able to participate. However, it is important to always consider the laws and regulations from each investors’ residence country that you choose to allow during the offering.
So, the interest in security tokens is growing immensely. In 2017 there where 3.1 million ‘security token’ Google searches, in 2018 (first seven months) it's already at 9.9 million.
In 2018 Q2 the ICO returns were negative. It seems that certain groups of investors became less interested in high stakes and high risks or got tired of all the ICO-associated ventures, and thus are seeking for more secure opportunities. So, the idea of an STO looks nascent and worth further attention.
The article is a collaboration with Martins Bratuskins, the Co-founder and COO of Monetizr, as an expert. Guest opinions do not necessarily represent the views of the editorial staff. Unless otherwise specified, all the info and statistic were provided by the Monetizr team.