Smarter Than Funding Via ICO : STO- Securities Token Offering

April 19, 2018

What’s Next for Crypto Cool Kid Crowd? Securities Token Offering aka STO. Unless you’ve been asleep for the past 12-18 months, a broad spectrum of cool kid entrepreneurs who aspire to be billionaire blockchain baristas has sought start-up funding via Initial Coin Offerings aka ICOs.  Ok, you already know that ICOs have been viewed as a purportedly quick, simple and low-cost way to raise lots of capital from any/all type of investors (but don’t forget your feasibility study!). By now, you might have figured out these new-age capital formation initiatives, which envision taking the concept of equity crowdfunding into digital cyberspace and have raised upwards of $6bil during the past 24 months, have been advanced by circumventing long-established regulatory guidelines with regard to private placement offerings and IPOs. You’ve also become aware that securities regulators in nearly every jurisdiction have launched separate securities fraud investigations that have targeted several dozen ICO issuers and have put forth policy edicts to address the burgeoning growth of “alt currencies” as well as “utility token offerings.”

securities-token-offerings-STOs“Securities Token Offering aka STO is the next step towards legitimizing investor offering schemes for digital asset initiatives..”

Let’s further presume you’ve discounted or outright dismissed the early advice expressed by thoughtful industry experts, including the principals of LLC, who have repeatedly cautioned ICO entrepreneurs to work towards staying inside regulatory goal posts when advancing ICOs. That guidance has emphasized the “3-Duck Rule” metaphor i.e. “If it looks like a duck, quacks like a duck and walks like a duck…securities regulators will view it as a duck. That guidance to ICO issuers has included 4 simple notions: (i) irrespective of the notorious ‘white paper’ approach, ICO issuers should make sure narrative within investor offering sections are clear as to terms and conditions, (ii) stipulate and document that subscription is limited to accredited investors, (iii) establish AML compliance procedures so as not run afoul of anti-money laundering edicts, and (iv) avoid any claims or assurance as to extent of profits that investors can realize by investing.

According to Chief Operating Officer Jacob Berkman, whose firm specializes in investor offering document preparation, “Based on the number of inquiries we’ve received during the past several months from entrepreneurs advancing blockchain-centric initiatives, the good news is many in the ‘crypto industry’ are finally getting the joke; smart-minded folks actually want to be as compliant as possible, explaining the newest approach and structuring deals within the framework of Securities Token Offerings aka STOs. ” Added Berkman, “Until recently, many so-called “Crypto Cool Kids” have failed to realize that longevity of any new asset class or alternative asset category is inevitably dependent on institutional investor participation, and there is a viable case to be made the STO structure comes much closer to addressing the needs of institutional players.”  In support of that view, international business lawyer Andrea Bianconi’s recent piece published in, “The Future of ICOs” is optimistic, and perhaps even prescient thinking. Below is an excerpt.

STOs will be the Future

ICOs have grown so rapidly also because they exploited an unregulated market loophole and — to be fair — the SEC is not wrong when they state that most of the utility tokens issued were in reality more like securities. Therefore it is safe to assume that, as the regulators will start to issue their guidelines — hopefully just like Switzerland did — this loophole will be soon closed. This means that the opportunity to do an ICO — the unregulated way like we have seen so far – will be limited to “real” utility tokens. Accordingly, unregulated or little regulated ICOs, will likely maintain their importance to fund mainly tech and innovative start-ups and social ventures where utility tokens will not fall within the application of securities laws.

But what about the rest then? What about the largest part of the market, all those more mature and proven businesses which are still interested in the ICO model as a new way of raising funds? Enter then STOs (Securities Token Offerings). STOs are today substantially unknown, but their potential is huge. Just recently the first ever Real Estate STO worth US$ 400m has been announced.

Equities, loans, real estate, anything that is considered today by applicable laws as a security or asset can be tokenized.  While securities´ laws will clearly apply to this category of tokens, the attraction for mature businesses is to tap into a highly liquid, borderless and decentralized market.  Just imagine if US$188billion IPO market slowly migrates to STOs and then just a tiny fraction of the current global debts, derivatives and commodities market follows suit (difficult to quantify, it is a mind-numbing number in the quadrillion league, see here for a visual representation of money markets today).

To continue reading Bianconi’s thoughts, click here