ICOs, or Initial Coin Offerings, were introduced as a brilliant model of crowdfunding that has helped raise millions of dollars for small ventures who could not afford an expensive equity fundraising process or a public offering of stocks. However, with the changing regulatory landscape and the increasing maturity of the crypto markets, ICOs are slowly morphing into STOs, or Security Token Offerings.
The rise and gradual decline of ICOs
As ICOs picked up interest among entrepreneurs, ventures raised in excess of $5.5 billion in 2017 and more than $6.3 billion in the first quarter of 2018. However, the momentum seemed to slow down from the second quarter in the face of regulatory uncertainty, falling prices of cryptocurrencies and ICO scams that had robbed people of millions of dollars.
Governments and financial regulators started seeing red at this simplistic model that could easily bypass existing regulatory framework. Some countries like China brought a blanket ban on all ICOs, deeming them illegal, while the US said that it would define ICOs differently and started the process of creating regulations around it. In the US SEC’s opinion, many ICO tokens are securities, which were bought with the expectation of profit and issued by a centralized entity. Therefore, the rules concerning securities and vehicles of investment were applicable to ICO tokens as well.
The declining trend of ICOs is, ironically, due to the lack of regulations. While many upcoming projects may wish to take advantage of ICOs, they do not want to be caught on the wrong side of law.
ICOs vs STOs
The potential of the ICO phenomenon can, however, be applied to not just the crypto market but traditional markets as well through STO and security tokens. These are assets on the blockchain, but also abide by many regulatory compliances due to their inherent properties.
While ICOs allow a company to raise funds only on the basis of a White paper, the model is also fraught with certain risks. Participants are contributing to an idea, not a tangible product or a service. They cannot claim any kind of rights in the company and cannot expect profits. They can only profit from the increased demand the token might have in the future.
Thus, ICOs aren’t backed by corporate accountability and it is left to the due diligence efforts of the investors to contribute in projects with a reputed team and a solid business plan.
STOs, in turn, provide a safe, legally-compliant way to connect the world of blockchain with the traditional financial system. STOs can open up the advantages of blockchain to centralized exchanges like Nasdaq and also create a direct avenue for retail and institutional investors to the crypto market.
Economic effects of STOs
Different real world assets being tokenized through an STO process bring benefits for both the traditional financial and crypto markets and their participants.
Institutional investors get:
- Accessible and regulatory compliant fundraising model,
- Novel way to access digitized assets like art, automobiles, gold, real estate and so on.
Retail investors get:
- Access to assets like real estate due to greater fractionalization,
- Opportunity to invest in bigger assets with smaller investment amounts,
- Lower transaction fees due to the low-cost model of the blockchain.
Crypto enthusiasts get:
- Great way to trade the tokens they are holding via their bank accounts and credit cards directly,
- Wider array of investment opportunities.
If you are a blockchain venture looking to raise funds, STO is a good way to go about it. A legally compliant way, it also creates corporate accountability — aspects that attract institutional investors and let them enter your business.
If you need expert help with your STO, we, at Platinum, are here to assist. We offer a comprehensive suite of services like PR, management, consulting, programming, cybersecurity, legal advisory and all ancillary services. We have helped companies raise more than $200 million till date.