Prepare as STOs Gain Traction
The application of the security token offering – or STO – as a crowdfunding method is gaining traction and industry insiders think it will be more popular starting 2019. The fundraising tool will ride on the success of the initial coin offering – or ICO – model but with regulations that hold token issuers accountable.
STOs started gaining preference late last year after the crackdown on ICOs which eroded investors’ confidence. By October 2018, inwara notes that the record of the most number of STOs ever seen before was made with Neluns’ raised $136 million and Tzero’s $134.7 million on top.
“STOs will be popular this year,” Naveen Sydney from hyperFIELD tells 8BTC. “There is a fundamental difference between ICO and STO. ICO is a utility offering hence the need and importance of the user base/community. STO is targeted towards investors. After review by regulatory boards all over the world, the general consensus is that they are all securities. The money was raised mostly from investors expecting a profit (Howey Test) and not from the user community for right of use.”
Jack Chia at Blockchain Alliance agrees that the STO model stands a chance in the space “but not too soon… it would take a while for people to warm up to the idea and understand the process.”
inwara’s Will 2019 be the year of the STO? report notes that the shift from ICOs to STOs is largely driven by the recent bottoming of the retail market (both Bitcoin and Ethereum) and softening demand from retail investors for ICOs. It also adds that STOs have “fueled an influx of investment into real off-chain businesses that provide equity/stake in exchange for capital” with Ethereum’s ERC 20 token adoption dominating the space (68%) followed by Polymath’s ST-20 token standard (23%).
Sydney, whose company plans to launch an STO for its enterprise B2B cloud-based solutions to private and government sectors later this month, adds:
“STOs (on the other hand) are financial securities offered as a digital asset. This will attract more mature and seasoned investors. That is why I believe that STOs will not end up like ICO. I also believe that ICOs are not over. Once the DLT user community matures and understands the true ICO model, we will see a comeback. The challenge however will be the requirements placed on the projects and the team. Whitepapers and pipe dreams will not get projects funded via STO.”
With a given assurance of ownership through digital deeds and share certificates, STOs seem the sure way to go. Regulations will make them thrive as a viable method of crowdfunding that is devoid of scams and any bubble hitting its market will be more sustainable. Also, depending on how its secondary markets evolve, the projected STO wave could drive the utility and price of major cryptocurrencies such as Bitcoin and Ethereum.
STOs are supposedly based on four layers. They are constructed on existing protocols such as Ethereum; programmed by smart contracts to ensure their utility and value creation; they use issuance platforms where utility tokens are created and distributed; and they are traded on exchanges to provide liquidity.
Aside not having whitepapers, other differences to ICOs include that STOs cannot be discounted in stages during sales and advisors are not allowed to take cuts from funds raised unless a regulated broker dealer.