Blockchain technology provided all the necessary tools to create tokens for projects or entrepreneurial ideas, giving people what they needed for quite some time. Thousands of projects and startups has created tokens on the blockchain and sold them to raise funds for product development, business management and marketing.
Not so far ago, in 2017, the ICOs raised about $7 billion, and some projects raised up to $200 million each. For almost a year, the EOS project managed to raise more than $1.4 billion. In 2018, around $8 billion was collected on all the ICO projects. It is difficult to argue with the success and effectiveness of ICO. However, now we got a better way to raise funds on the blockchain – Security Token Offering (STO).
STO is a lot like ICO. In the framework of STO tokens are created on the blockchain, which are then put up for sale to raise funds for development, marketing and business management. The main difference is in the properties of the tokens and what functions they perform.
The ICO uses practical tokens (utility tokens). This implies that tokens should do something for their owners, somehow serve them. Utility tokens do not bring dividends or a share of the future income of the project. Instead, their owners get access to services on the platform after its launch. In many cases, owners can also use these tokens to pay for gas or transfer fees. The ICO token holders often know little about the project, and despite the fact that they invest in a team, they cannot be called investors in a traditional sense of the word.
However, ICO Tokens have obtained practical properties rather than securities not by an accident. At the dawn of the emergence of ICO, project managers and developers understood that their tokens should have nothing to do with securities in order not to compete in the stock market of companies. Otherwise, their projects would be subject to the laws and rules for issuing shares. Before placing tokens for sale, they would also have had to get approval from regulators such as the Securities and Exchange Commission (SEC). And this is a complex, costly and restrictive process.
Of course, many crypto exchanges decided not to accept tokens that have any properties of securities. That was a measure in order to avoid problems with regulating authorities. The sale of utility tokens on the blockchain created a risk of scam and made it difficult for investors to choose. If investors are deceived, they have no legal protection, since the ICO still does not fall under existing laws and regulations.
However, regulators around the world show great interest in the ICO and the blockchain industry. But blockchain projects can enjoy freedom only for a limited amount of time. Sooner or later, this industry will fall on the control in one way or another.
And then… enterprising industry participants came up with STO.
In October 2018, on the Indiegogo platform was held the first STO in history. The company St. Regis Aspen Resort from Colorado (USA) was one of the first companies to start raising money this way and raised $18 million.
Tokens that are created and sold as part of STO are securities and act like traditional stocks. Their owners have the right to a share of profits and the right to vote in the decision-making process.
Before creating offers with such tokens, regulatory approval must be obtained using the same rules as for issuing shares. This process includes all necessary payments and the provision of data to the appropriate authorities. The STO model in many aspects is still at a very early stage of development. It is used only by some companies. However, its nature and protection measures attract investors, and the STO model may become more popular than ICO over the next few months or years.
So… shall we expect that the ICO will give up their positions?
Sometimes ICO is the perfect way to raise funds for a project. A good example would be a decentralized or open source project. In this case, the project creators will face difficulties in issuing tokens as stocks, because they do not have a company and they cannot satisfy most of the requirements of the regulatory authorities.