The Security Token Offering (STO) – It’s a Trap!

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Security Token Offering, or STO as it is better known, has become more common in today’s crypto fundraising market. As we all know, the initial coin offering (ICO) spawned a generation of tech enthusiasts looking to launch their coin on the open market and in doing so offer it at a cheaper rate.

There appears the evolution of the STO, to date its origins may seem quite harmless; however, if you fully understand the ICO model and the typical investment world, you will understand that the STO is nothing more than a move by those in the old school world of finance to regain some level of control in their world of investment. financing.

Note: For the purposes of this article, we will treat ICOs and token generation events as the same thing.

This article explores the underside of what an STO really means and the factors that come into play when you are considering an STO.

You’re bowing to VC pressure

Generally, by issuing an STO and security tokens, you bow to venture capitalists and institutional investors. The reason they have little interest in entering an ICO is that their risk-reward model is much lower. That’s based on common sense when you consider that they generally have to be accountable to trustees, boards, or some sort of member of their organization.

ICOs, in their standard form, are very risk-oriented. Therefore, the risk-reward structure is aimed at those who take the most risk and get the most reward. Hence why so many see hundreds of percentage returns if they get into an ICO early.

In pursuit of this “VC” money and in an attempt to regain control of their lost position, VCs have convinced many companies to issue security tokens instead of a strict ICO utility token; thus ensuring that the VC firm gets its usual ability to raise some form of capital that is transferred from the security token. Meanwhile, those who are undertaking a true ICO control their entire company.

It is worth remembering that most financial and venture capital firms hate ICOs for the simple reason that it spells the death of their operating model. For too long, venture capital firms have been demanding most of the companies in exchange for seed capital in the hope that the company will succeed. When successful, the venture capital firm will set up its own board and allocate its shares to whomever it sees fit. Essentially, the dreams of the founders are pushed aside by the need for capital.

So when the concept of an STO is proposed to venture capital firms, they naturally love it because it helps them maintain their current status quo. A status quo that sees them controlling access to the investment, startup and start-up environment.

There is no secondary market for STO

To date, there are no exchanges operating in the secondary market, although there are many in the planning phase. The possibility of these exchanges in markets like the United States and China is nothing more than a long dream for many. While utility tokens already do well in these markets (subject to controls imposed by various governments and exchanges), they have a thriving industry and many exchanges are outperforming typical financial institutions.

An STO exchange would be, as we all know, a broker. These brokers would be subject to harsh control laws, including the amount of commission they can receive, annual filings, KYC checks, and account maintenance. This affects the user in several obvious ways. For example, if I am working with a broker, these transactions may be subject to a myriad of hurdles. As easy as most brokers try to make these transactions, the legislation just gets in the way most of the time.

Furthermore, it would be almost impossible for any exchange to be able to serve clients on a global scale in the STO market. Keeping up with each country’s individual exchange laws would be cumbersome, expensive, and take more effort than the payoff would be, so a “universal” security token exchange might be impossible.

Register one, register them all

Where will you register your STO? To become an STO, you must have registered the offer somewhere, which means it is subject to the laws of a country, KYC directors, and government inspection. Naturally, government bodies love this idea.

Take the United States as an example. When you fill out Regulation D, A, C or any other security document, you are effectively passing ALL of your personal information to them. When the SEC (or any other watchdog) has all that information, it’s very easy to track the company for purposes of, for example, taxes, complaints, investigations, etc. When you register in the US do is distribute yourself under that law. Meanwhile, European companies cannot sell US securities without the required license, just as you cannot sell European securities in the US without the required license. So just because you’ve become an STO in one place doesn’t mean you’ve complied with laws all over the world.

As for those companies that believe that they can become security in one place and not security in another, it is crazy. I would not register under an exemption in the US and then claim to the UK market that it was NOT a security. I have already signed the paperwork and filed it with a government agency saying that I am an asset. Remember: If you file in the US, you are subject to US law. The SEC will ask how you are selling your US-based security to foreign persons and what laws you have complied with in that home country.

Finally, the number of people who believe that filing documents in the US does not make them securities is again mind-boggling. When you file a Regulation D, you are filing a exemption. This means you are a security, but is exempt from the usual filing requirements due to the method and people you will be selling to. Securities laws still apply.

Eliminate decentralization

When you present procedures before any authority, you are eliminating your decentralization. The authority has control over everything you do, as a company, as an individual and as a project. It has to be done in accordance with the laws and regulations of that country.

This means that in addition to passing on all of your information, you are also allowing the governing body to obtain information about everybody of its participants, who will then be subject to taxes, laws, regulations and controls of that country. It sort of removes the spirit of true decentralization, doesn’t it?

You should make a public offer

If you don’t have the stomach to attract the crypto community and share the risk-reward level with them, the argument is that you should ultimately go public in some kind of jurisdiction.

A public offering allows you to sell your company and raise funds to achieve your purpose. It also means that you can advertise and sell to anyone within the scope of the jurisdiction. The whole purpose of an ICO is to allow companies to raise capital without giving up any of their capital or control. In exchange, a tradable digital asset is created, which may or may not increase in value.

When you do an IPO or STO, you are removing community control and the naturalized economy of the token itself.

Example: What drives up the price of Apple Inc.? Company news and activity. What drives the price of Bitcoin up? Community news and activity. It pushes your token economy out of the hands of your followers and into the hands of merchants, creating a totally different situation, and one that means instead of being able to get a few hundred percent reward, you’re just rewarding your believers with a small percentage in movements, most of which will be linked to general market activity rather than cryptocurrencies.

There is a difference between tokenized assets and an STO

Finally, it is worth noting that there is a difference between an STO and tokenized assets. If you want to tokenize an asset using a digital signature (blockchain), it is actually a common sense step, and many successful projects have been launched from the concept of fractional ownership. These work great when they control the exchange of these tokenized assets on their own platform or exchange area. Organically, they grow very well and are supported by their user base, and can often only be traded with their own token, which is issued during a typical ICO. The fact that something has become a fractional ownership model through tokenized assets does not make it a security token by default.

The bottom line here is that the STO is a model that is loved by those in the VC, finance, and even the typical legal world. Yes, even American lawyers. love the STO model because it does not scare the life out of your insurance company nor does it mean that they will be subject to a possible SEC investigation.

The truth of the matter is that if you’re considering an STO, you should probably go the conventional equity route: loan notes followed by an initial public offering. There is little that can be done with the tokens, and you are losing most control of your company anyway if it is linked to shares or listed through regulators. My message is this: stop falling on the STO line. If the market grows and STOs become a real possibility, consider it. Until then, you’re just giving in to the world of old-school finance.

Guest post by Cal Evans of Gresham International

Since 2016, Gresham International has helped entrepreneurs, companies, governments, and groups launch their coin or token offering to market.

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