What is STO?

Why Security Token Offerings Could Be the Next Big Crypto Megatrend

• Over the past few months, we’ve witnessed a huge boom in the number of ICOs being offered. While many have been genuinely good opportunities, a small number have proved to be extremely problematic.The problem with ICOs isn’t just that many of them are scams — it’s also that many of the utility tokens offered are actually securities. As a result, they are violating the securities law in the U.S.In July 2017, the Securities and Exchange Commission (SEC) released a report stating that certain tokens were eligible to be classed as securities, and would, therefore, be subject to regulation.

• A security token is one that has been backed by external, tradable assets. One of the main applications of security tokens is that they grant companies with the ability to issue tokens that represent shares of company stock.These tokens are subject to federal securities regulations.A utility token represents future access to a company’s product or service. It is not designed to be an investment. A utility token might be best compared to a gift card, for example.The key difference between security and utility tokens is that security token holders are entitled to ownership rights, whereas utility tokens function as coupons and give holders no rights or stake in a company’s platform or assets.

• In order to determine whether or not a digital token is a security, we can apply the Howey Test. This is used to confirm whether or not a transaction qualifies as an ‘investment contract’.If it meets the criteria, then it will be considered as a security and will be subject to additional disclosure and regulation requirements.In order to be classified as an investment contract under the Howey Test, a token must meet the following requirements:

  • The user is investing money (however, later cases have expanded this to include the investment of assets)

  • The user expects to profit from the investment

  • The investment is in a ‘common enterprise’ (this term has not been precisely defined. Many courts have used different interpretations)

  • Any profit comes from the efforts of a third-party or promoter (if an investor’s actions have a large influence on whether or not the investment will be profitable, it is likely that the token will not be classed as a security)

  Theoretically, should a token meet these requirements, it will be classed as a security token. Otherwise, it will fall under the definition of a utility token.However, there is still a substantial amount of ambiguity as to how the SEC will apply this test to cryptocurrencies.

• Almost all ICO tokens are expected to increase in value over time as a result of speculation and product development since the supply is fixed.Therefore, because most people buy tokens with the view of holding them as an investment, many projects are actually viewed as securities.As a result, all of these projects violate securities laws. This is frowned upon by regulators.

• More significantly, it can also reduce legal risk and provide protection for both the company and the contributors

• To fulfill this requirement, investors should meet one of the following requirements:

  • An annual income of over $200,000 individually, or $300,000 with a spouse, maintained over the previous two years and with the same expectation for the current year.

  • Net assets worth upwards of $1 million, excluding the primary residence (unless more is owed on the mortgage than the residence is worth).

  • An institution with over $5 million in assets — e.g. a venture fund or trust.

  • An entity made up entirely of accredited investors.

• Overstock has recently announced that one of its portfolio companies, tZERO, will be launching an ICO designed to fund the development of a licensed security token trading platform.

  The tZERO tokens that are issued from this ICO will be in accordance with SEC regulations.

  tZERO token holders will be entitled to quarterly dividends from the profits generated by the tZERO platform.

  The launch of licensed security trading platforms like tZERO will drastically increase liquidity for security token investors.

• KODAKCoin — the cryptocurrency designed to power the recently announced digital imagery platform, KODAKOne — will be the first third-party cryptocurrency to launch on tZERO’s securities token platform.

  KODAKOne is a blockchain powered photography platform. The KODAKCoin cryptocurrency enables professional and amateur photographers to receive payment for licensing their work, receive a share of the overall platform revenue, and sell their work through the secure platform.

• As it stands, there are only a few securities tokens in existence. It is likely that this is largely down to the difficulty of launching one.

  Ethereum made it simple for startups to launch their own utility tokens. Now Polymath is aiming to make it simple to create securities tokens.

  The platform can be used as a tool to allow financial companies to create and issue their own tokenized securities.

  Polymath will be a fully functional marketplace where token issuers and token investors will be able to connect. Their securities token protocol embeds regulatory requirements into the tokens. These tokens will only be available to verified participants.

  It will open up the blockchain to legally-compliant securities offerings and provide users with a decentralized protocol to simplify trading of security tokens.

ICO is Outdated, STO is the New Term to Fundraise with Cryptocurrencies

• As much as ICOs are beneficial for these startups, one cannot say the same for cryptocurrency customers. Hence, the Securities and Exchange Commission (SEC) has tagged it a fraudulent fundraising process.According to reports, the Chief Executive Officer of Overstock, Patrick Byrne, revealed that there is a new, safer strategy to raise fund in the cryptoverse known as Security Token Offerings (STOs).
• These STOs allow investors to purchase digital tokens as a public offering, just like it is done with the ICOs, but there is a clear difference. Unlike the ICO fundraising, these coins will be backed by the company’s assets, revenue, or profit. It is just like purchasing shares in a company but with more versatility.