STOs offer investors the opportunity to invest in a digital asset which is regulated by financial market laws. Compared to ICOs, they are better suited to meet the requirements of most retail and institutional investors.
ICOs are dead, long live STOs.
That seems to be the current chorus of blockchain-fundraising enthusiasts.
But it’s too early to announce the death of ICOs. The first half of 2018 saw ICO volumes reaching $13.7 billion, double the amount of the entire year 2017.
Thus, ICOs are still popular and play a vital role in blockchain-based fundraising. It’s unlikely the ICO will die soon.
However, it’s likely that ICO volumes will drop and be bypassed by STOs big time.
Security tokens are regulated investment vehicles
STO stands for “Security Token Offering”. Just like ICOs (“Initial Coin Offerings”), STOs are a method of blockchain-based crowdfunding. The major difference is, that during an ICO, a utility token is being issued, while an STO distributes a security token.
Security tokens represent a tokenized asset, such as equity or real estate. Thus, they are considered an investment product by law and have to comply to strict financial market regulations.
On the contrary, utility tokens provide token holders with access to a digital product or service. Thus, they are not considered an investment product and are not regulated by any government body.
STOs improve legal certainty
ICOs have raised about $22 billion this year. While that seems to be a big number, it’s not much on a global scale. And most likely, we have seen the peak of ICO volumes this year. ICOs are too risky and not suitable for most investors.
According to a study conducted by PWC, two thirds of all ICOs fail. Regulatory and compliance issues are the main reason.
As there are no regulations in place, there is nothing an investor can do if the company goes bankrupt or does a runner. This legal uncertainty has opened the door for fraud and has negatively impacted the reputation of ICOs. That’s also the reason why institutional investors have mostly shied away from blockchain-based fundraising so far.
Regulated blockchain-fundraising will attract institutional investors
With regulated STOs, there will be enhanced investor protection, strict reporting requirements and more rights for investors.
Besides regulatory advantages, the value proposition of security tokens makes them a more suitable investment vehicle than utility tokens.
Buying a utility token is more like buying a product or service. “ICO-Investors” are not really investors. Mostly, they don’t own an asset and they don’t have any voting rights or profit share agreement.
They are more customers who have an interest in the value within the product. There is nothing wrong with that, but it’s not the main interest of most growth investors who buy an asset to achieve capital growth over time.
STOs, on the other hand, serve the interests of growth investors in a much better way. Buying a security token is the same as investing in its underlying asset, just that it happens via a blockchain-based token and not via traditional securities markets.
On the contrary to ICOs, STOs also have the potential to compete with traditional financing instruments such as IPOs. They offer businesses the opportunity to attract capital in the same way, but at a lower cost, because there is no need to pay investment bankers or lawyers.
Due to enhanced legal certainty, STOs will eventually attract institutional investors. ICOs won’t, at least not on a large scale. And Institutional money is the big ticket. A study conducted by LAT crypto research says the security token market will grow to US$ 5 trillion by 2025. That’s massive compared to the current size of the ICO market.
STOs are the next major milestone for blockchain-based fundraising. Once intuitional investors are onboard, the sky is the limit. At this point, we will see blockchain fundraising moving into the mainstream. ICOs will stay around, but they will be much smaller in scale and remain more of a niche phenomenon.