Today, the market of financial innovation is rather diverse. An ICO (initial coin offering) is a new mechanism for blockchain-based startups to receive financing that is similar to crowdfunding. However, following an extraordinary growth at the turn of 2017–2018, the ICO market progressively declined. In 2021, ICO is still a strong instrument for generating funds, but a new trend — Security Token Offerings or “tokenized securities” also gains popularity. This article will tell you about STO as a new method to raise capital.
Traditionally, entrepreneurs, business angels, venture capital funds, and crowdfunding platforms have been the primary sources of funding for businesses. There has been an increase in the number of alternate sources recently. Today, a rising number of entrepreneurs are using cryptocurrencies to raise capital (this is also known as an Initial Coin Offering). As we all know, the ICO era has produced a large number of crypto-enthusiasts as well as crypto-fraudsters. ICO is an unmanaged process that no legislation governs.
As a result, Security Token Offerings are taking the role of ICO. Security tokens are asset-backed financial promissory notes that are considered legally enforceable blockchain-based investment contracts. Security tokens authenticate ownership and allow owners to exercise their investment rights (rights to shares, dividends, profit shares, etc.). However, acquiring tokenized securities is more difficult because, according to financial authorities’ regulations, only authorized investors with huge capital can buy them. Important to note that security tokens are traded in compliance with the legal restrictions of various financial regulators (such as SEC or FINMA).
Furthermore, security tokens address one of the most serious issues with ICOs: the lack of reimbursement guarantees in the event of project failure or organizer fraud. Furthermore, they can be used as a risk-hedging instrument for an investment plan, such as the Simple Agreement for Future Tokens (SAFT). This strategy is deemed safer because it allows accredited investors to purchase tokens after the project’s debut, but it still contains significant risks. People invest in the promise of obtaining tokens in the future, rather than in tokens themselves.
To start an STO, you need an infrastructure that assures the security of the issue and conforms with regulatory standards in terms of information transparency and investor verification via KYC / AML procedures. There are some examples of platforms: Securitize (blockchain-based platform for security tokens, that employs smart-contract), Polymath (performs functions of connecting point for developers, investors, and KYC / AML vendors), Harbour (a platform based on Ethereum that tokenizes any startup after it has gone through the On-chain Regulator Service.)
In conclusion, the ICO (Initial Coin Offering) has evolved into the STO (Security Token Offering), taking the best of the best and attempting to eliminate the problematic aspects. The high level of investor protection is one of the primary benefits of security tokens. Because the risk of fraud in this sector is reduced, you can invest almost in any project you want. In addition, tokenized securities are less volatile than utility-tokens.
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Valentina BEREZA, Team bit4you