STO: The Best Blockchain Finance Model? | Blockchain Central


Hey everybody, welcome to a new episode of
BLOCKCHAIN CENTRAL! In today’s episode we’re going to talk
about something that is called BOTH “the next big thing in blockchain”, and “the
end of blockchain as we know it”. What’s that? STO’s or Security Token Offerings are on
the agenda today! —INTRO— First of all, let’s see what STO’s are
and how they differ from ICO’s or Initial Coin Offerings. If you need a refresher on what ICO’s are,
check out this video. The main difference is reflected in the name:
Security Token Offerings, as the name suggests, offer securities to the buyers, while ICO’s
focus on making coins available to them. If I was to summarize the difference in one
sentence, I’d say that, if you participate in an STO, you become a partner in the business
as an interest holder, whereas—with an ICO—you become invested in the success of the coin
itself. It is sometimes said that STO’s hold intrinsic
value and they can guarantee interest, profit sharing, dividends, voting rights etc. You might argue that ICO’s are also a form
of a security, as they are an investment in a common enterprise with the expectation of
profit. Many ICO teams, however, were proactively
trying to avoid being classified as a security to avoid a long list of requirements imposed
by the SEC. This has been an ongoing discussion whether
ICO’s should be considered securities and the primary tool for determining it is the
so-called Howey Test. The purpose of the test is to determine whether
something should be classified as a security, even if it is offered under a different name
to avoid regulatory action. The primary question that we should ask ourselves
when performing the Howey Test is whether the profits we mentioned before are expected
to come solely from the work of others; that is the enterprise we invested in. When it comes to coins, their success depends
not only on the hard work of the issuer, but also on the market sentiment and the behaviour
of other buyers, which led many not to classify ICO’s as securities. As of right now, in early 2019, we clearly
see that such a complete lack of regulatory oversight has not worked well for the industry
with multiple ICO scams present in the past two years. STO’s on the other hand, don’t shy away
from complying with SEC requirements and embrace the regulatory oversight. In fact, the drive to comply with legal requirements
might be a defining factor of an STO as opposed to an ICO. The level of oversight can also help us classify
STO’s into three categories: Reg D, Reg A+ and Reg C F. Regulation D or Reg D is a SEC regulation
governing private placement exemptions and can be a way for smaller companies to accumulate
capital without the cost and hassle of an Initial Public Offering. The rules are still relatively strict requiring
the enterprise to provide proper framework and disclosure documentation, including names
and addresses of their executives, as well as details regarding the offering. Under Reg D, the issuer of the securities
must also disclose any prior “bad actor” events. Although not aimed exclusively at accredited
investors, Reg D guidelines strongly favor those over unaccredited ones which can slightly
raise barrier to entry. The second category, Regulation A+ or Reg
A+, which is usually referred to as the best pathway to STO’s, allows the enterprise
to annually sell up to $50M worth of securities to the general public. In return, the issuer has to submit audited
financial statements in their offering documents and file reports with the SEC on an ongoing
basis. Regulation CF which stands for Crowdfunding,
limits the annual amount of money that can be collected to 1 million 70 thousand dollars
and requires the auction to take place online through an SEC-registered intermediary, such
as a broker-dealer or a funding portal. It is clear that big crypto players have already
been looking at STO’s for some time. Coinbase — the largest Bitcoin exchange in
the U.S., acquired Keystone Capital — a financial services firm — in June of 2018 therefore
becoming a fully regulated broker-dealer. We can already see that the STO’s will be
significantly more regulated and hopefully safer than ICO’s but now, we have to answer
a fundamental question: what’s the point? Why even bother bringing securities to the
blockchain? As always, the answer is the democratization
of the investment process, allowing investments to happen across borders and removing gatekeepers
who prevent individual, low-tier investors, from participating in the market. A blockchain-based security can hold all of
the relevant asset information, such as capitalization tables, dividend payments, voting rights,
or liquidation preferences. Each participant will know, at any time, what
their stake is and how much it is worth. This information, as it’s integrated with
the blockchain, will be secure and immutable. And when we bring smart contracts into the
picture, it could potentially also help automate necessary parameters, for example pertaining
to restricted stocks. Another strong draw of the STO’s could be
the liquidity of security tokens. Whereas investing in a start-up would usually
require a five to ten-year exit period, security tokens promise near-term liquidity on exchanges
that will trade tokens 24/7 and attract a global pool of investors. Also, if you factor in the possibility to
infinitely divide an asset, it could open opportunities for a completely new class of
trust funds and asset portfolios. There are, of course, many risks associated
with this new asset class. Some people question the existence of a secondary
market for security tokens, others are afraid of a new batch of bad actors riding the hype
train into riches. Many exchange platforms are looking into expanding
their operation by including security tokens in their offer, but as of early 2019, no mainstream
platform has provided such services. Also, it is understood that a truly decentralized
stock exchange would require both the issuer and the purchasing party to comply with international
regulations, if it is to operate across borders. This would make it almost impossible for any
single exchange to service clients on a global scale in the STO market. Keeping up with each countries’ individual
exchange laws would be cumbersome, costly and effectively render “universal” security
tokens impossible. But by far the biggest concerns voiced by
the crypto community have to do with the fear that this STO movement is a way for the old-school
finance world to take back some level of control in the financial realm. They are worried that the increase in regulatory
oversight will counteract the decentralization and democratization of the market. We’ll see what the future will hold, but
we remain cautiously optimistic. It’s just important to remember that the
compliance requirements of the STO’s are here to protect you against a scam and not
bad investment, so always do your due diligence when purchasing assets. Before you go, please note that this content
neither represents financial, legal, or tax advice, nor is it supposed to be understood
or interpreted as solicitation to buy or sell any securities, coins or tokens. Thank you so much for watching. If you liked this video, make sure to hit
that like button and don’t forget to subscribe to Blockchain Central to never miss a beat! See you in the next one!

Leave a Reply

Your email address will not be published. Required fields are marked *