ICOs have gotten a bad name. And given the fact that we’re constantly hearing about scams and illicit dealings, it isn’t hard to see why. Then there are the well-intentioned ideas that don’t make it to the first line of code, and the omnipresent threat of the SEC hovering like a black cloud.
The ground is starting to shift, and many blockchain companies are moving away from ICOs and toward regulated security token offerings, otherwise known as STOs.
WHAT ARE SECURITY TOKEN OFFERINGS (STOS)?
Just when you’ve gotten your head around ICOs, you have a new acronym to learn: Security Token Offerings (STOs). These are regulated offerings in which the issuer sells programmable equity to investors.
Darren Marble, CEO of CrowdfundX, a fintech company that markets Reg A+ IPOs and compliant ICOs (most notably KodakCoin), has a few words of advice on the subject.
“The SEC has made clear that, at the moment, all ICOs they have seen appear to be securities. This has led to a movement in the US towards Security Token Offerings, STOs. At some point in the near future, security tokens will trade on regulated secondary exchanges such as tZERO, Coinlist, or even NASDAQ.”
STOs are seen as more stable and legitimate than ICOs, as they can provide investors reassurance from the get-go that they won’t run into problems down the line.
Marble says, “STO issuers have several available securities exemptions at their disposal… Each has its pros and cons, and it’s important for issuers to understand the differences between each exemption.” Since most blockchain companies are not experts in this field, they’ll need a little help.
HOW TO EMBARK ON AN STO
1. Seek Legal Advice
Any blockchain company looking to embark on an STO should first seek the services of a qualified securities attorney. “Preferably one that straddles both traditional markets and crypto,” Marble advises. One of the biggest requirements is that a Form 1-A must be filed with the SEC. This is a process that takes 60 days to complete, plus another 60 to 75 days to be qualified by the SEC.
2. Get Your Books in Order
Embarking on an STO is significantly harder than creating an ICO, giving it even more weight and likelihood that the project behind it is solid. To get started, a company needs to have their books in order. A Reg A+, for example, requires two years of audited financials.
3. Find an Underwriter
Once your paperwork is up to speed, you need to get an underwriter. “Many startup hopefuls think a coin or token will help raise all the capital needed to hit the ground running. Reality check: you’re not going to raise $10 million for a highly technical blockchain company without the help of an underwriter or investment bank,” Marble says.
He continues, “Issuers that sell unregistered securities in the US may be subject to fines, suspensions, or be forced to conduct a rescission offer, which means rescind a transaction in which a securities violation occurred (not fun). In a worst-case scenario, issuers who knowingly violate federal securities may face jail time.”
THE TAKEAWAY
It’s been a fun ride for a lot of ICO teams, but the dust is starting to settle. Getting rapped on the knuckles is one thing; spending time behind bars is quite another.
While STOs come with additional layers of complexity in terms of paperwork, regulation, and processes, it’s likely that more blockchain companies will head down this path in the months ahead.
One Response
So what’s the point of creating an STO versus an equity underwriting? Seems like an STO has the worst features of tokens and shares of stock for the future. Will there be two separate markets trading cryptos or will STO’s move over to NASDAQ….. likely Gemini? What will other countries do that can’t be coerced by the U.S.? What about the several hundred worthy tokens that are unregulated?
There are better solutions. Self-regulation of the space is one such as smart contract escrow for ICO funds …. avoid if not present. Congress could actually develop new regs more appropriate for digital assets than the 1930’s – 1940’s securities laws. They could also stop the SEC’s self serving attack on crypto space until those regs are ready.
Chairman Clayton was asked by the Senate Finance Committee earlier in the year to tread lightly and not to impede innovation. In response, he’s been stomping heavily on everything his resources will allow hoping to establish his authority before Congress can do anything to reduce it.
Say NO to STO’s! Add a “P’ for the SEC: STOP! Let your rep know: https://democracy.io/#!/