Will STOs Rule The Cryptosphere in 2019?

The world of crypto used to be the Wild Wild West. Scammers raised millions of dollars in minutes through an ICO just to vanish into thin air with investor money. The worldwide government didn’t know how to treat cryptocurrencies so held off on issuing strict laws to rule over them.

As the cryptosphere evolves, so does its regulation. Every week there’s a new story in the media about a country banning the mining of cryptocurrency, another country creating its own coin, or a political figure issuing a statement for or against cryptocurrency.

After a few high-profile cases involving blockchain startups and the SEC, a safer alternative to the ICO has emerged — the STO, or security token offering.

The Fall of Munchee

Before we dive into what exactly a security token offering is, let’s take a look at a startup that made headlines for its bout with the SEC. On the surface, Munchee looked like any other ICO on the market at the time. In exchange for restaurant reviews on their app, users would receive rewards in the form of tokens. They launched their ICO with the goal of raising $15 million. They labeled the tokens that investors would receive as “utility” tokens, meaning they were issued for use on their platform.

However, the SEC saw it differently. On December 11, 2017, the SEC labeled MUN tokens securities, stated that they violated the Securities Act and ordered a cease and desist against the company.

Why Munchee?

The definition of “security” as defined by the Securities Act of 1993 is as follows:

The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

As cited in the ruling, the purchase of MUN tokens were considered part of an investment contract with its investors having a reasonable expectation of profiting from Munchee’s efforts.

The Aftermath

The SEC ruling against Munchee sent shockwaves throughout the crypto community that had largely felt it existed beyond the reach of the U.S. government.

In response, many companies holding an ICO chose to exclude U.S. citizens from being able to invest, even going so far as to block access to its ICO page from IP addresses located there. Others decided to put their ICO plans on ice until regulatory implications became more clear.

But still other forward thinkers chose to find a new way to raise capital outside of the traditional IPO or venture capital structure while staying firmly rooted in the crypto movement. Enter the security token.

STO vs IPO vs ICO: What’s the Difference?

Here are some of the major differences between the three.

STO vs IPO vs ICO

Basically, if the initial public offering and the initial coin offering were crossbred in a laboratory, the security token offering would be the result. ICOs were all the rage in 2017 and even 2018, with an estimated $6.5 million raised in 2017 and $21.4 billion in 2018 to date (source). Still, IPOs received even more investor dollars, totaling over $52.2 billion (source).

It remains to be seen whether STOs will be able to attract the investor numbers that ICOs and IPOs currently do.

The Who’s Who Of Security Tokens

Polymath

It would be difficult to talk about security tokens without mentioning Polymath or its charismatic founder, Trevor Koverko.

In its first tweet, Polymath links to the SEC press release that concluded the DAO Tokens were in fact securities and states, “If only there was a way to easily create, issue and trade securities tokens on the blockchain”.

Launched in 2017, Polymath was the first in the security token platform race. Through the Polymath Network, investors are connected with KYC providers to confirm their identity and accreditation status. Once the process is completed, investors have access to buy and sell security tokens on the platform.

When a company wants to raise capital through selling security tokens, they’re connected with a legal delegate through the Polymath platform. Next, the compliance process is completed and investor requirements are set. A STO contract is created and approved by the issuer. (Source)

7pass, Corl, MintHealth, IPwe, and BlockEstate were the first security tokens created using Polymath.

tZERO

tZERO is an alternative trading system that allows investors to trade security tokens. Led by Overstock CEO Patrick Byrne, it raised over $460 million through its STO that concluded on August 6, 2018. It’s the first security trading platform regulated by the SEC and the Financial Industry Regulatory Authority (FINRA). The benefits that tZero offers over traditional exchanges include a huge reduction in transaction fees, faster trades, and increased liquidity.

With such a high-profile leader at its helm and an enormous amount of funding raised, tZERO will be one to watch.

Securitize

Securitize, which launched early this year, provides a security token platform that services “the entire digital security lifecycle, from initial issuance to trading, distribution, and governance.” Securitize was built in response to CEO Carlos Domingo’s tokenized VC fund, SPiCE VC’s quest for global compliance. Companies that have launched an STO with Securitize includes Lottery.com and Realecoin.

Indiegogo + St. Regis Aspen Resort

One of the most high profile companies that used security tokens to offer an equity ownership stake in its business is the St. Regis Aspen Resort. The illustrious resort partnered with crowdfunding platform Indiegogo to become its first STO. The company successfully raised $18 million through its platform.

Conclusion

STOs are subject to stricter regulation than initial coin offerings, which seems to be the antithesis of the crypto movement. But by lending an increased legitimacy to the industry, STOs will likely help to increase the widespread adoption of cryptocurrency and blockchain technology.

Not only that, but STOs have the added benefit of protecting investors from thieves who launch an ICO with the intention of walking away with millions. Ultimately, this will benefit the crypto community as a whole.